The Hungarian government will cap retailers' profit margins on some staples at 10% from the middle of March and last until the end of May.

The announcement by Prime Minister Viktor Orban came after the release of the February inflation data that showed headline CPI edging up to 5.6% (chart) from 5.5% a month earlier as food prices rose by 7.1% year on year, compared with 6% in the previous month. The data came 0.2pp above the market consensus, a negative surprise after the spike in January.

Orban said the government had held talks with supermarket chains to mitigate "unwarranted and exorbitant" price increases, but the retailers' offers were "well short of our expectations". He noted that the price of eggs had climbed 40% and butter and sour cream prices were up more than 80%.

The new regulation covers 30 key food products, including poultry, dairy, flour, and cooking oil. Among the items subject to the margin cap are chicken breast, whole chicken, UHT milk, sunflower oil, margarine, pork cuts, eggs and various dairy products such as cheese and yoghurt, National Economy Minister Marton Nagy detailed.

The margin cap will apply only to retailers with annual net sales exceeding HUF1bn, (€2.6mn) and whose primary activity falls under food retailing, thus exempting the two Hungarian-owned retail chains, COOP and CBA operating under a franchise model. The reference point for the 10% margin limit will be January's average prices.

The margin cap limits retailers from increasing their mark-up on these products and mandates that any margin exceeding 10% must be lowered. "No margin can increase on the affected products, and any margin currently above 10% must be brought below this threshold," Nagy emphasised.

The government intervention was needed because food inflation stands at 9-10% at present, Nagy said. The government expects that the measure will lead to a 10-15% decrease in the price of products in the food basket and overall lead to a 2pp decline in inflation. "If food inflation does not fall from 9-10% to 7-8% by April, we are prepared to extend or strengthen the measure, including the introduction of direct price caps," Nagy stated.

The February data showed that core inflation, which excludes volatile fuel and food prices, was 6.2%, up from 5.8% in January and inflation edged up 0.8% m/m, following a 1.5% surge in January. Despite government efforts to curb price growth through regulatory measures, inflationary pressures remain entrenched, particularly in the services sector, where costs rose by 1.2% month on month and 9.2% y/y.

Labour-intensive industries such as healthcare and home services saw notable price hikes, reflecting the impact of wage adjustments. Within food prices, the price of flour jumped 44.3%, cooking oil prices climbed 27.5%, milk prices rose 22.5% and the price of fruit and vegetables climbed by 14.5% in annual terms in February. Household energy prices fell 0.2%, while motor fuel prices climbed 3.8%. Consumer durable prices rose 1.6%.

After the reading, ING Bank has revised its 2025 inflation forecast from 5.1% to 5.6%, cautioning that inflation is likely to fluctuate between 5.0% and 6.5% throughout the year. This sharply contrasts with the government's projection of 3.2% in the 2025 budget, suggesting potential fiscal policy adjustments ahead.

With inflationary risks mounting, policymakers face a delicate balancing act: premature monetary easing could weaken the forint and exacerbate price pressures, while prolonged tight conditions may stifle economic growth. The MNB will hold its first rate-setting meeting at the end of the month with the new leadership, and the updated inflation report is due out after the meeting.

Peter Magyar, leader of the opposition Tisza Party, has called for the immediate resignation of Economy Minister Marton Nagy, blaming the government's "economic and financial dilettantism" for Hungary's mounting fiscal troubles, the soaring budget gap and runaway food inflation.

He called for a radical reduction in VAT on healthy food products to 5% and the abolition of the windfall tax on retailers. Magyar accused Nagy of erratic policymaking that is deepening the cost-of-living crisis.