The inflation in Hungary is just as bad as it is in the rest of Europe: in 2021 the rate of the inflation was 7.4%, which was a 13-year-old record. It is a logical step from the government that they want to reduce its level and want to moderate the prices.
However, while other European countries reduce the taxes or give direct financial support to the citizens or the sellers, the Viktor Orbán uses more radical and leftist methods: he introduces price caps for several products. The question arises: how does it work and what’s the problem with it?
The “Unorthodox” Inflation Management
Due to the pandemic, and the rising energy prices, the inflation is very high in Europe and Hungary is not an exception either. The crisis has a distinctly bad timing: there will be elections in April and the opposition is finally teamed up to beat Viktor Orbán and Fidesz, who has been governing the country since 2010.
The ruling party is still in the lead, however – according to our latest polls – the opposition – United for Hungary – is very close to Fidesz, and their following is almost the same. Orbán knows that an economic crisis could destroy his support and could be the reason for an election defeat.
Because of that, he made some serious decisions: from the 1st of February, the prices of six essential products – milk, flour, sugar, sunflower oil, milk, pork leg and chicken breast – will be cut back to the level of 15th of October 2021.
Later, the Minister of the Prime Minister’s Office added that the sellers must cut back the price of the chicken tails as well. Gergely Gulyás made it clear that there will be no state aid or compensation for the shops and it is not a tax reduction: the shops have to cut off their profits. He also said that all shops have to sell these products as if they had sold them in October.
The goal of this measure is twofold: on the one hand the government wants to help the people by cutting off the prices and show that they could manage the crisis at all costs. Orbán likes to show that he could solve a crisis by himself even if it is a word-wide problem, just think about the migration-crisis or when he ordered COVID-19 vaccines without the European Union.
However, on the other hand he also thinks about the elections: he needs to show that the economy is working, and aims to delegitimize the opposition, who could only solve the problem with economic restrictions, according to the right-wing communication.
We can see that it is not something new in the Orbán-regime: from 2013, there are price caps on the energy sources – the so-called overhead reduction –, and he froze the price of petrol as well at the second half of 2021.
And – on the surface – these measures work: the prices will be lower, the overhead reduction won the elections in 2014 for Fidesz, and these are their most beloved policies – besides the border fence. But at what cost?
Live in Today, Don’t Think about Tomorrow
It is true, that the cut prices could give people the impression that the prices are lower, and we could buy more of these goods…but the economy doesn’t work in this way (unfortunately). In the following I collect the facts that prove that the measures of Viktor Orbán could not improve the life of the people not even in the short term.
First, the actors of the market will not give up their profit. By law, they cannot sell these items above the level they sold them in October, and they cannot add additional costs to the invoice if someone buys these products.
However, they could increase the price of other products. You can see that no one could live on milk, chicken breast and oil, you must buy other essential products as well for a balanced diet. And shops could make up for their lost profits from the prices of other products.
The price cap could increase the demand and the inflation. Since petrol is not a replaceable product, you can play with its price, it would affect little on the inflation and the demand. You won’t buy twice the gas if you know the prices are fixed at the current level, and you travel the same distances.
However, the chicken breast could replace the chicken wings – or other part of the chicken, or other type of meats –, so it could increase the demand. If the price of the chicken breast becomes much lower than the other type of meats, then you can expect that people will buy more of it.
And when you cancel the cap, the price will rise to the stars, with the other products as well, because as you remember, the price of the substitutes has already increased to make up for the loss.
The price caps also have a bad message for the international actors. This measure is only acceptable in a capitalist country, when it is preparing for a war, it is already in a war-situation, or if there is a huge economic crisis. We could say that price cap is the last measure a country would use to stop the inflation, because it is clear that it is always a temporary success.
Today, in Hungary citizens believe that the government could abuse the market as it wants, but it is not true and the international actors know it.
The price cap may create distrust in the Hungarian economy for two reasons: on the one hand, the actors of the market will except a bigger crisis, because of the radical tool and the fear of the inflation which will be materialized after the cancelation of the cap.
On the other hand this kind of interference in the functioning of the market always has the message that ‘you could be the next one’. There is no proof that tomorrow there won’t be any cap for the jellybeans for example. International sellers like a predictable market, but these kind of regulations makes the Hungarian market unstable and unpredictable.
The worst part will be dealing with this problem down the line. No matter who will win the elections in April, the new government will have to face a huge inflation and the anger of the people as well. There will be four years to solve this problem, but it is sure that the first years will be rough.