The causes and background to the 2021-2023 surge in inflation

Abstract

In the decade of 2020, overlapping inflationary waves followed each other consecutively. The demand-supply frictions after the COVID-pandemic, the energy crisis and the Russian-Ukrainian war had a significant impact globally but affected the European Union and its eastern member states more severely. High energy usage and the dependence on energy imports from Russia made the Eastern European region more vulnerable to the shocks of the previous years. In Hungary, however, six additional country-specific factors also played a role in having the largest inflation rate among the EU countries between November 2022 and October 2023. The (1) deficiencies in the food industry’s competitiveness and its higher cost sensitivity, (2) the largest increase in enterprises’ energy prices in the EU, (3) the strongest profit-­driven inflation, (4) the expansionary fiscal policy, (5) the negative effects of market distortion, and the (6) weakening forint with stronger exchange rate pass-­through into prices were all responsible for the inflation peak of almost 26 percent at the beginning of 2023.