Hungary's Inflation Resilience: Why Disinflation May Falter and What It Means for Investors

The National Bank of Hungary (NBH) has spent years battling inflation, which peaked at nearly 21% in 2022. While annual inflation has since cooled to 4.5% in May 2025, a closer look at its components reveals persistent vulnerabilities that could delay rate cuts and destabilize financial markets. For investors, the risks are clear: a fragile disinflation narrative may push the forint lower and bond yields higher, demanding caution in exposure to Hungarian assets.

The Fragile Disinflation Narrative

Despite headline inflation slipping to 4.5% in May, core inflation—excluding volatile food and energy—remained stubbornly elevated at 4.8%, a five-month high. This suggests underlying price pressures are not yet fully subdued. Key sectors driving this resilience include:

1. Food Prices: Annual inflation in food, alcohol, and tobacco surged to 5.9% in May, up from 5.4% in April. Persistent supply chain bottlenecks and rising input costs for agriculture, exacerbated by droughts in key production regions, have kept prices elevated.
2. Energy Costs: After a rebound to 5.3% in May, energy prices remain volatile. While euro-area energy inflation is negative (-2.7% in June), Hungary's reliance on imported fuels and regulatory lag in passing savings to consumers have kept local energy prices elevated.
3. Government Profit Caps: The government's 2023 price controls on utilities and groceries have created distortions. While they temporarily slowed headline inflation, they have also stifled investment in energy infrastructure and food production, risking future shortages and renewed spikes.

Why the NBH Can't Cut Rates Yet

The NBH's policy rate has been frozen at 10.25% since March 2024, but the central bank faces a dilemma. While headline inflation is below the 5% threshold that once justified aggressive hikes, core inflation's persistence above 4% leaves little room for easing.

The NBH's mandate prioritizes price stability, and its credibility is on the line. A premature rate cut risks reigniting inflation, especially if energy prices rebound or food supply chains tighten further. This is why analysts now expect rates to stay steady through 2025, with cuts likely delayed until 2026.

Risks to the Forint and Bonds

The forint has already been a laggard in emerging markets, depreciating 8% against the euro in 2025. Weak disinflation could accelerate this decline. A persistently high policy rate relative to the euro area (where the ECB's rate is 3.75%) has supported the forint, but if inflation stays elevated, the NBH's hand will be forced to raise rates further, a move that could spook markets.

Meanwhile, bond yields are under pressure. The 10-year Hungarian government bond yield rose to 10.4% in June 2025, up from 9.8% in early 2024, as inflation risks and political uncertainty (e.g., the government's antipathy toward foreign investors) deter buyers.

Investment Implications

Investors in Hungarian assets face two primary risks:
1. Currency Depreciation: The forint's weakness is structural, given Hungary's large current account deficit (4.5% of GDP in 2024) and reliance on foreign financing. Hedging via currency forwards or shorting EUR/HUF pairs is prudent for those holding forint-denominated bonds.
2. Bond Yield Volatility: With inflation risks elevated and political tensions unresolved, Hungarian bonds are vulnerable to sell-offs. Short positions or underweight allocations could limit losses if yields rise further.

Equity investors should also proceed cautiously. While consumer staples and energy companies may benefit from price resilience, broader market gains are unlikely without clearer disinflation signals.

Conclusion

Hungary's inflation dynamics are a cautionary tale of how structural rigidities and policy trade-offs can undermine disinflation. With core inflation anchored above 4% and political tools like profit caps proving counterproductive, the NBH's path to rate cuts remains blocked. Investors must treat Hungarian assets as high-risk, prioritizing hedging against currency fluctuations and avoiding long positions in bonds. The forint and Hungarian yields are unlikely to stabilize until there is sustained, broad-based evidence of cooling price pressures—a milestone still months away.

Stay vigilant, and hedge accordingly.