National Conservatives Can't Find a Good Excuse for Viktor Orbán's Inflation Disaster

Hungary's inflation hits 24.5 percent—the highest in the European Union—and Orbán's price controls aren't helping.


Viktor Orbán is a hero to American national conservatives. So when in January 2022 the Hungarian Prime Minister announced he would supplement price caps on fuel and mortgage rates by mandating that sugar, flour, sunflower oil, chicken breasts, pork legs, and certain milk products be sold to consumers at lower October 2021 prices, some of this anti–free market cohort celebrated his decisive action to "protect families" from inflation. "But, but, but, what would Milton Friedman say!" tweeted Compact magazine editor Sohrab Ahmari, mocking advocates of market economics. This was "the party of the state for the win."

Well, we know what Friedman would have said: These price controls will not work as you intend. Limited to a small range of goods, they won't dampen even measured inflation rates. They cannot suppress actual inflationary pressure, which is determined by the intersection of total spending and output. Even if almost all prices were controlled, as in the U.S. during World War II, a lower measured inflation would ill reflect the reduced quality and product reformulations that sellers would reach for to circumvent price controls. When controls are removed, the official price level would surge again anyway. 

No, the primary impact of crude price caps, Friedman would say, will be shortages of controlled products. At artificially low prices, the quantity demanded would expand, exceeding the now smaller quantity producers are willing to supply, forcing rationing and queuing, while encouraging black markets. There'd be no reason to expect that poor households would benefit from this scramble.

Well, what do you know? Headline inflation in Hungary is currently the highest in the European Union, running at a massive 24.5 percent, with food and power prices up 49 percent and 56 percent through December 2022. Fiddling with the relative price of goods has, predictably, done nothing to curb the inflationary forces of the Ukraine war supply shocks and excessive domestic stimulus. It has made the Hungarian central bank's job of curbing inflation more difficult, with mortgage, fuel, and food price freezes distorting the consumer price index that it targets. 

What has happened is that 56 percent of Hungarians report experiencing regular shortages of price-controlled food products. Supermarkets are rationing sales of covered goods, to which eggs and potatoes were added in November. There have been shortages of granulated sugar, chicken breasts, and pork legs, and retailers are struggling to meet regulations for minimum stock. The central bank's governor, Gyorgy Matolcsy, has explained that price caps are offset by other non-controlled prices rising, as consumers shift to products they can find and producers seek higher margins elsewhere.

Fuel price caps exhibit the shortage effect best. Orbán capped gas and diesel prices in November 2021. Imported supply began drying up. Orbán thus narrowed eligibility for capped prices to just private, farm, and taxi vehicle sales. Nevertheless, consumer demand, unexposed to the incentive of high international fuel prices, stayed high with sales up 20 percent annually by October, despite petrol stations struggling for profitability. Pretty soon, a grounded fear of shortages induced the inevitable panic buying, resulting in Soviet-style queuing at filling stations. Orbán relented and removed the cap in December. Gas prices swiftly jumped by 46 percent. 

Has this ongoing experiment helped normal Hungarian families? Even aside from all the queuing, searching, and rationing costs for the poor, the Hungarian Central Statistical Office's own data show that households with low incomes, large families, and pensioners saw higher inflation in 2022 than those on average or high incomes.

Faced with mockery for supporting these failing price controls, defensive national conservatives such as Sen. J.D. Vance (R–Ohio) are now blaming "a million refugees" from Ukraine for pushing up Hungarian prices. This number is wrong (just 33,603 Ukrainian refugees wanted to settle in Hungary—far too few to drive this inflation) but, in any case, the argument stretches credulity. 

Yes, 2.15 million Ukrainians have crossed into Hungary temporarily since the war began (equivalent to 22 percent of Hungary's population), and this could boost demand for food and fuel. But 9.3 million have passed into Poland (25 percent of their population)—a country whose inflation rate, while still high at 16.6 percent, is almost 9 percentage points below Hungary's. In any case, higher demand from a larger consumer base strengthens the argument against price controls—as it means the inevitable disruptions will be worse.

Rather than reaching for a scapegoat, national conservatives should heed the lesson. They may believe that the national interest demands overriding market outcomes, especially when war is undoubtedly squeezing living standards. But junking market prices has a cost, even if it's your ideological ally doing the junking.