A surge in the price growth in eastern Europe has opened a rift between central banks which launched rate hikes to combat inflation and populist governments trying to defend a strong economic recovery.
The standoff is most apparent in Hungary and the Czech Republic, where national elections have complicated the task of central banks which have led the way in the European Union for monetary tightening. Both companies have raised key rates by more than a percentage point since June.
Tight labour markets and expansionary fiscal policy have added to global pressures on inflation, which economists say will haunt the EU's east longer than originally believed.
Central and Eastern Europe is one of the regions of the world where the risk of sustained higher inflation is greatest in the next few years, capital economy analyst Liam Peach said.
Facing the prospect of a close election next year after three successive landslides since 2010, Hungarian Prime Minister Viktor Orban has provided handsouts to voters in defiance of central bank calls for fiscal restraint.
Finance Minister Mihaly Varga has cautioned the Central Bank against tightening policy too soon for fear of triggering an economic slump.
Another similar standoff occurred before the Oct 8 - 9 elections in the Czech Republic, where Prime Minister Andrej Babis lost power. He had criticised the RBI's biggest rate hike for over two decades as damaging for the economy.
This month, Poland's central bank unexpectedly increased rates to combat inflation in the medium term.
Across the region, October's CPI is likely to exceed or hit 6% in yearly due to external factors such as energy, fuel and food prices, mostly. However, we continue to believe that inflation in the CEE Central and Eastern Europe is not transitory, Societe General said.
While higher inflation is a global phenomenon, the steep wage rises tied by a chronic labour shortage set Eastern Europe apart from developed countries. Another 20% increase in the minimum wage is planned for next year.
In a recent poll with the Hungarian Job Board profession.hu found that hiring intentions had already exceeded levels seen before COVID-19 pandemic, when labour markets were already tight and more than half of the companies surveyed planned to lift wages by at least 10% next year.
Everybody's hiring, said Randstad, staffing company Sandor Baja, HR Consultant for the Czech Republic, Hungary and Romania. Employees know full well that their employers are exposed The Supply-and-demand equation tells them not to swallow a fall in purchasing power. Economists say the region could face renewed bouts of market volatility during a period of heightened uncertainty over inflation and monetary dynamics after the upside surprises in Poland and the Czech Republic.
The central bank of Hungary is expected to raise its base rate by another 15 basis points to 1.8% on Tuesday. However, some economists see an outside chance for a 30 basis-point hike after September inflation rose to a nine-year high.
The 5 Year Treasury Yields have risen to about 3.6% in the past week, their highest levels in about three years, also pressured by rising U.S. Treasury yields The Czech 10 year bond yields (currently bid at around 2.37%) are at their highest since 2009 even though interest rates have dropped in the next few years due to weak demand from the US government and inflation.
Supply chain disruptions, rising raw materials prices, higher energy and transportation costs and heftier wage bills are gradually seeping into prices, a procurement manager of a Hungarian transport components manufacturer said.
Will these cost rises require huge amounts of effort from suppliers to swallow them, said the manager, who decliend is also able to be named.
Next year we expect some normalization in raw materials and energy prices, but not a drastic decline and these new levels will definitely exceed the pre-crisis costs. Central European families are also increasingly alarmed by rising inflation, a Eurobarometer survey showed. Inflation concerns in Hungary, Poland and the Czech Republic are among the highest in the 27 countries of the EU.
Katalin Almasi, a retired 63 year old, said she needs to work as cleaner in a Budapest shopping mall to make ends meet.
You can see the price rises everywhere, especially in food and fruits. She said: "You really need to have a good look around to see where they are worth buying".