Another intervention in the food market is possible: the government would reduce inflation by restricting profits

Profit Restriction: Another Government Intervention on the Horizon

The state is prepared for direct intervention

Gergely Gulyás stated that several types of profit-restricting measures are possible, including both regulatory and voluntary solutions. The government expects that some market players may voluntarily implement a form of profit cap. If this does not happen, the state is prepared for direct intervention, with tools including profit maximization and the reintroduction of price caps.

Effects of Price Caps and Mandatory Discounts Still Felt

Previous government interventions have played a role in shaping food inflation trends. By imposing price caps and mandatory discounts, the government artificially kept prices low for certain staple foods, delaying the impact of inflation on these products. However, after price caps were lifted at the end of last year, these prices began to rise sharply, contributing to the 6% food price increase measured by the KSH in January.

The biggest price hikes were recorded for products that were previously subject to price caps:

• Milk
• Eggs
• Flour
• Cooking oil

Price increases for these products began in July 2024, reflecting the delayed impact of price caps and mandatory discount policies. Between January 2022 and January 2025, overall food inflation was approximately 65%. In the case of eggs, price hikes were further exacerbated by global supply shortages due to avian influenza in the US, Poland, and Northern Europe. Meanwhile, cooking oil prices are not proportionally higher than three years ago, though they experienced a major spike before stabilizing.

Is Government Intervention Really Necessary?

Economic analysts and the Hungarian National Bank (MNB) have repeatedly emphasized that price caps can have long-term distorting effects. The sharp price increases observed after price caps were lifted suggest that inflationary pressures, once suppressed, can later resurface even more strongly.

Profit restrictions would be a new tool in the government’s policy arsenal, one not previously used in the Hungarian food market. The question remains as to how this could be implemented under regulatory frameworks. Revenue caps—limiting income rather than setting price ceilings—are a known economic policy tool, typically applied in sectors with monopolistic or oligopolistic structures. However, the retail sector does not fit this profile, as competition is intense and profit margins are low.

Retail Sector: Is There Anything Left to Restrict?

State intervention in pricing often backfires in the long term. Nevertheless, the government likely sees price caps as a political success, otherwise, it would not keep suggesting their potential return.

The fact that immediate action has not been taken suggests that the government is aware of the potential negative side effects. Available data indicate that major food retailers’ profits do not justify intervention: in 2023, Lidl’s profit margin was just 2.3%, Penny’s was 1%, Auchan barely broke even, while Spar, Tesco, and Aldi operated at a loss, mainly due to special retail taxes and other financial burdens.

Given the current market conditions, significant profits are not evident in the retail sector, making the effectiveness of profit restrictions questionable.

Negotiations and Uncertainties

Negotiations between the government and market stakeholders are still ongoing. The National Trade Association (OKSZ) has stated that all players must contribute to reducing inflation, but discussions on the specifics have yet to take place. The OKSZ also raised concerns about potential competition law issues and announced plans to consult the Hungarian Competition Authority.

Experts believe that profit restrictions could represent a new approach in the government’s anti-inflation strategy. However, the effectiveness of such measures will largely depend on how they are designed and implemented. It remains unclear in what form and to what extent the state will intervene in market processes, as well as the potential impact on prices, competition, and key retail sector players.