While inflation in Western Europe is expected to be brought under control within a year, there is a growing sense that the runaway prices in Central Europe will last much longer. Central and Eastern Europe have been at the forefront of fighting inflation for several months, both in terms of accelerating price pressures and in terms of the sometimes uneven efforts of their central banks to contain them. The most recent inflation data for the region ranged from almost 16% in Romania to just over 20% in Hungary, well above the official target of 1% to 4%. Bread and cheese prices in Hungary rose about 70% year-on-year in September, while sugar prices jumped 50% in Poland, with some stores cutting supplies over the summer in anticipation of a sharper rise in prices.

Unions are negotiating bigger wage increases to keep workers buying power, while companies are raising prices to protect profit margins. As a result, there are growing risks that the looming economic slowdown will not contain inflation to the extent that central bankers are hoping for. “The longer inflation and wage pressures remain strong, the greater the risk that higher interest rates and a sharp rise in unemployment will be needed to weaken demand and restore price stability,” said Nicholas Fahr, an economist at Capital Economics Emerging Europe. Confidence in the region’s central banks was tested last month when the depreciation of the forint forced the Hungarian national bank to raise interest rates on an emergency basis just weeks after it attempted to end rate increases with inflation still rising.

The vast majority of Poland’s central bank members are also recommending a halt to raising interest rates as growth is expected to slow sharply in 2023. However, keeping inflation under control could be difficult as the government wants to spend ahead of national elections. Inflation expectations are unrelated to central bank targets, said Dan Buksa, chief economist at UniCredit CEE. A survey conducted by the Polish Statistical Office showed that more than 70% of consumers expect inflation to fluctuate at the same level or even higher over the next 12 months.