Inflation Dynamics and Food Prices in Hungarian Agricultural Economy

Abstract

During 2021-2022, many commodity prices rose to record levels. As a result, Hungary in 2022 experiencing high inflation, large trade deficits, and an unstable macroeconomic environment. High commodity prices, particularly for food, also have adverse effects on poverty. Hungary has not experienced for a long time such increase in inflation, which is among the highest in Europe. Inflation growth has recently associated with large energy price shocks, food price increases are traditionally believed to have rather small effects. At the same time, there has been an absence of rigorous work to identify empirically the relative importance of each factor contributing to inflation. It is thus of vital importance to improve the understanding of the causes of inflation in Hungary to allow adequate policies to be put in place. The purpose of this paper is to fill this gap and thoroughly analyze the determinants of inflation in Hungary using data for the current decade, with a focus on food prices. The authors identify the relative importance of several factors contributing to overall inflation and its major components. The main finding is that, in a longer perspective, one of the main factors that determine domestic inflation are the food prices. In the short run, agricultural supply shocks strongly affect domestic inflation, causing large deviations from long-run price trends. The results suggest the need for a multi-pronged approach to fight inflation. This analysis suggest monetary and exchange rate policies need to take into account agricultural production, which is among the key determinants of inflation. Moreover it has a greater influence on inflation than is widely known.