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CEE inflation broadening out

  • Central and Eastern European economies are experiencing their worst bout of inflation since the late-1990s as surging food and energy prices have added to strong core price pressures across a broad range of goods and services. Monetary tightening cycles are likely to continue with interest rates rising to 8% or so over the next few months and we think that rates will remain above neutral for several years.
  • Inflation across CEE has strengthened markedly since the start of the war in Ukraine. Headline inflation in Czechia surged from 11.1% y/y in February to 16.0% y/y in May. Over the same period, inflation in Poland rose from 8.5% to 13.9% and, in Hungary, from 8.3% to 10.7%. These rates have come in far above expectations and are now at their highest since the 1990s. In the Baltic States, inflation is close to 20% y/y.
  • In total, 85% of the rise in inflation in Poland since February, and 70-75% in Czechia and Hungary, reflects food and energy. Food inflation has surged to rates of 15-20% y/y, in large part due to supply disruptions that have been exacerbated by the war in Ukraine. (See here.) The strength of inflation is broad-based: inflation of grains and vegetable oils has unsurprisingly surged, meat inflation in Poland is at its highest rate since the 1990s, and dairy inflation in Hungary is running at its highest in at least two decades.
  • Meanwhile, high energy prices have pushed motor fuels and utility bills up sharply. Fuel inflation is more than 30% y/y in Czechia and Romania. Gas CPI inflation ranges from 50% y/y in Poland and Czechia to 85% y/y in Romania and the more extreme 200% y/y in Estonia. (See Chart 1.) In Poland, coal prices have surged and the contribution to inflation from “solid fuels” is now twice that of gas. (See Chart 2.)
  • While energy prices have increased across the region, government support has been effective at shielding households in a few countries. Gas inflation is less than 20% y/y in Croatia and Slovakia. Hungary’s government has capped utility bills since 2014 and introduced a fuel price cap in November – inflation in May was 2%-pts lower than where it otherwise would have been without the latter cap. (See Chart 3.)
  • Looking ahead, we think food and energy inflation will rise further this year. Motor fuels inflation should peak soon if, as we expect, oil prices fall steadily from $113pb now to $100pb by year-end. But this will be more than offset by higher food and utilities inflation. Supply disruptions due to the war will push grains and vegetable oil prices up further and pork prices in Poland look set to surge. (See Chart 4.) We expect CEE food inflation to soon reach 20-25% y/y. (See Chart 5.) What’s more, household utility bills will rise further and could increase particularly sharply by year-end if supply is constrained during a cold winter.
  • While a large part of the inflation shock reflects commodity prices, the region is also experiencing strong and persistent core price pressures. Eurostat’s measure of HICP excluding food and energy has surged to multi-decade highs of 9% y/y in Poland and Hungary and 12% y/y in Czechia. (See Chart 6.)
  • These pressures are broadening out, with the prices of most goods and services rising at their fastest rates since the 1990s. Goods inflation is particularly strong in Czechia and Hungary, while services inflation is hotter in Poland, likely due to its tighter labour market. (See here.) Even so, inflation of “sticky” items such as housing rentals has risen everywhere (see Chart 7) which is particularly worrying as it suggests the presence of more lasting price pressures even though interest rates have risen by 500bp since mid-2021.
  • Easing supply shortages should drag goods inflation down next year, but services inflation is likely to stay strong and we think inflation will remain above 10% well into 2023. We think central banks will tighten policy further, with rates rising to 8% in Hungary and Poland and 7% in Czechia over the coming months. Our inflation and interest rate forecasts generally lie above the consensus.
  • Once these price shocks pass through, we think the shift will turn to rate cuts from mid-2023. But there’s a risk that, with inflation expectations so high, second-round effects become stronger and inflation becomes entrenched at high rates. The upshot is that we think central banks will keep policy tight for a few years by keeping interest rates far above their estimated neutral levels through to at least 2024. (See Chart 8.)

Chart 1: Gas CPI (Apr. 2022, % y/y)

Chart 2: Poland Energy Inflation (Selected Components, %-pt Contribution to Headline Inflation)

Chart 3: Hungary Fuel Inflation & Oil Prices CEE Food Consumer Prices (% y/y)

Chart 4: Poland Pork Producer & Consumer Prices

Chart 5: CEE Food Consumer Prices (% y/y)

Chart 6: HICP ex. Food & Energy (% y/y)

Chart 7: Housing Rentals (SA, % m/m Annualised)

Chart 8: Policy Interest Rates (%)

Sources: Refinitiv, CEIC, Capital Economics

Sources: Refinitiv, CEIC, Capital Economics

Liam Peach, Emerging Europe Economist, +44 (0)20 7808 4990,

Liam Peach Emerging Markets Economist
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