Foreign retailers in Hungary, already reeling from a windfall tax, price caps and compulsory stocking of these products, are assessing the impact of the Hungarian government’s latest unorthodox, anti-market measure obliging them to offer price discounts.

The government will oblige major grocery chains to offer price discounts, government spokesperson Alexandra Szentkiralyi said at a regular press briefing on April 20.

"The improvement in the inflation data was already visible thanks to the government's measures, but the cabinet decided to introduce a new tool based on Greek and French examples, classifying basic foodstuffs into 20 categories such as poultry, cheese, bread, baked goods, vegetables, fruit, and cold cuts, from July 1 at the latest", she added.

Retail outlets in question will have to offer a product of their choice in all categories at least 10% cheaper than the price in effect in the 30 days preceding the special offer, according to the plan.

Products must be selected for the special offers every week, excluding those with a price cap on them, in order to ensure that the possibility of purchasing at a discount covers a wide range of products.

Besides the war and sanctions, the government has partially blamed Europe’s highest CPI  –25.6% y/y in March according to Eurostat, three-fold higher than the EU average, and 45% food inflation, two-fold the EU average – on overpricing and the excess profit of companies. Teaming up with competition watchdog GVH, the government set up an online price-monitoring platform, set to be launched on July 1, that is aimed to boost competition and prevent overpricing.

Authorities have inspected more than 6,000 shops since the price caps were introduced, Szentkiralyi said, adding that inspections would continue as long as the price caps are in effect.

At the start of the press conference, the head of the Prime Minister's Office, Gergely Gulyas, said the government will extend price caps until the end of June from April 30.

Earlier government officials linked the elimination of price caps to strong disinflationary trends, but as inflation has slowed at a lesser pace than expected, it has now resorted to a populist, politically-driven move.

The food price caps were introduced before the election, setting October 15 prices as the base. These were applied to granulated sugar, BL 55 flour, refined sunflower seed oil, pork leg, chicken breast and back, and UHT cow's milk with 2.8% fat content. In November, the government extended the regulation to potatoes and eggs.

Local observers say the government’s latest measure not only goes against the basic principles of a market economy, putting further burdens on retailers, but will be counterproductive to fighting inflation as companies may spread their losses on other products.

In face of the 45% annual food inflation, consumers have become increasingly price sensitive, also reflected in the decline of retail sales in Q1, which is no wonder given the record high inflation.

The mandatory discount scheme could force retailers to turn to lower-quality products and thus lead to an increase in imports.

The announcement came out of the blue and retailers are now assessing the financial impact, the head of the retail association Gyorgy Vamos said. The unorthodox measure will cost billions of forints of losses, which comes in addition to the progressive, revenue-based windfall tax, losses from the price caps, and a regulation that forces companies to stock a higher level of these products,or face fines.

The ban on Ukrainian grain, meat and fruits could also slow down the deceleration of consumer prices, according to experts.