External and Domestic Drivers of Inflation: The Case Study of Hungary

Abstract

Factors that have tended to result in declining inflation rates worldwide since 2013 include subdued global economic activity, declining energy and commodity prices, technological innovation and inflation expectations that are anchored at historically low levels around the world. The relationship between globalisation and inflation is a popular research topic among economists. According to much of the literature, the influence of globalisation and external factors on national inflation rates has increased in recent years. In this paper we investigate how external and domestic drivers affect inflation in Hungary. The country is an interesting case study, since its openness has grown significantly. Indeed, Hungary is now one of the most open economies in the EU. The Hungarian experience could thus be interesting for countries with an increasing trend towards openness. Using several statistical methods, we examined and analysed the impact of external and domestic drivers of Hungarian inflation, and how these external factors and their effect on inflation have varied in time. Our results show that the role of external factors in domestic inflation developments has strengthened in recent years. Especially after 2012, changes in inflation in Hungary were influenced mainly by external effects.