BUDAPEST/WARSAW, Nov 7 (Reuters) – While inflation in Western Europe is expected to be largely under control within a year, there is a growing sense that in Europe central runaway prices will last much longer.
Central and Eastern Europe has been at the forefront of the inflation battle for months, ahead of the curve both in terms of accelerating price pressures and the sometimes uneven efforts of its central banks to stem them. .
The latest inflation figures in the region ranged from almost 16% in Romania to just over 20% in Hungary, well above the central bank’s target ranges of 1% to 4%.
Hungarian bread and cheese prices rose around 70% year-on-year in September, while sugar prices in Poland jumped 50% as some stores sold out in the summer due to anticipation hoarding further price increases.
As unions negotiate steep wage increases to retain purchasing power and companies raise prices to protect profit margins, risks are mounting that an impending economic downturn will not rein in inflation as central bankers hope so.
“The longer inflation and wage pressures remain so strong, the greater the risk that higher interest rates and a sharp rise in unemployment will be needed to weaken demand and restore price stability,” he said. Nicholas Farr, Emerging Europe Economist at Capital Economics.
The credibility of the region’s central banks was tested last month when a slump in the forint forced the National Bank of Hungary into an emergency rate hike weeks after it attempted to halt rate hikes. rate as inflation continued to rise.
Poland’s dovish majority at the central bank is also suggesting an end to rate hikes as growth is set to slow sharply in 2023, but inflation may be difficult to control as the government seeks to spend ahead of national elections.
Inflation expectations are becoming unanchored from central bank targets, said UniCredit CEE chief economist Dan Bucsa.
Bucsa pointed to consumer spending at the start of the period in the first nine months of the year, which he said shows that households expect inflation to rise again and that wage negotiations are leading to a wage growth much higher than in the past.
According to the latest central bank survey, Hungarian household inflation expectations have risen well into double-digit territory. Think tank GKI said price hike intentions rose across all sectors except construction last month.
A survey by the Polish Statistical Office showed that more than 70% of consumers expected inflation to stay at the same rate or even more over the next 12 months, while the survey by the think tank BIEC showed an increase in household and corporate inflation expectations.
PRICE PRESSURES
The economic fallout from the war in Ukraine has exacerbated already strong inflationary pressures due to tight labor markets, years of rock-bottom borrowing costs and fiscal stimulus to spur economic growth.
In Hungary, Erzsebet Kristofi, a 47-year-old single mother of a child with special needs, has relied much of this year on charity.
“Everything has become more expensive, bread, staples… cooking ingredients, everything,” she said, as she queued for a hot meal on the outskirts of Budapest during the week last.
“That’s why I come here, to have something fresh every day and bread, pastries or vegetables.”
Government price controls have been put in place in Hungary and Poland on certain food, fuel and mortgages, taking effect late last year and early 2022.
In Hungary, some price caps are due to expire at the end of the year, but the government has signaled it will extend some of them, as it has done in recent months.
The picture is less clear in Poland, although credit holidays to ease the burden of higher central bank interest rates continue through 2023.
There is no indication that the price pressure will ease soon.
LPP (LPPP.WA), Poland’s largest retailer, said it plans to raise prices by 7-19% to offset rising costs and exchange rate effects.
Even with economic growth slowing to around 1%, Poland’s main employers’ association predicts wage increases of 10-12% next year.
Hungarian companies plan to raise wages by an average of 9% in January, according to Sandor Baja, managing director of recruitment firm Randstad (RAND.AS), and further hikes could not be ruled out in some sectors later in the year. ‘year.
THE SITUATION IN POLAND
With economies in the region already slowing, the potential impact on growth prospects of increased monetary tightening to rein in inflation, and upside inflation risks from soaring producer prices, tight labor markets and exchange rate volatility have become the main dilemma facing central bankers.
In Western Europe, economists and financial markets widely expect eurozone price growth to return to the European Central Bank’s 2% target by 2024.
The outlook is very different for Central Europe.
“Inflation expectations are very high and unanchored. This is the biggest threat for me,” said National Bank of Poland policymaker Joanna Tyrowicz, who is part of a hawkish minority in the rate setting panel.
“Unanchored expectations clearly separate Poland from the eurozone, where expectations are reacting well to the ECB’s change in rhetoric,” she said.
Marek Drimal, chief CEEMA strategist at Societe Generale, expects Polish inflation to peak at over 20% in February and exceed 10% at least until the end of 2024. Hungarian inflation could reach 24 percent in February-April, to hit single digits by mid-2024, he said.
“Poland is in a more dangerous position, we think,” Drimal said. “The upcoming general election should spur fiscal expansion and, in particular, the planned significant increase in the minimum wage from January could indeed trigger more substantial wage growth across the board.”
Businesses expect annual inflation of 10.3% in one year and 7.5% in three years, well above the bank’s 2% target, according to a Czech central bank survey central.
Erste Group economists said inflation in the region could become a “persistent phenomenon”.
Additional reporting by Paweł Florkiewicz in Warsaw and Marc Jones in London; Editing by Elaine Hardcastle
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