On the Border Between Creeping and Galloping Inflation

Just two or three years ago, we at Lider were contemplating how (high) inflation had disappeared from the face of the Earth and how in the developed part of the world, the greater danger was deflation rather than inflation, because, after all, the Western man has today satisfied all his existential needs, and much more than that, while Eastern economies 'churning out' far more goods than can be sold in the world, and so on. How naive we were!

Inflation has returned to us. And now we (the older generation) must learn again how to live with it, while the younger generations, those who entered the labor market after the last anti-inflation program in the mid-1990s, must still master the basic concepts to at least distinguish what is and what is not a problem with the current inflation in this neo-inflationary time.

Is it, for example, a major economic problem that in April, Croatia recorded an annual inflation rate of 9.4 percent? Not yet, it is still within the framework of so-called creeping inflation, but whether it will soon become so depends on a number of factors.

– Inflation is like a raised body temperature. A healthy and strong organism usually calms its temperature on its own. Only in cases of higher and prolonged temperatures does the organism need help, or medication. The same goes for inflation. Unfortunately, the Croatian economy is neither strong nor developed, nor is it healthy, as it has had negligible or very low growth rates for many years and lacks a systematic developmental economic policy, while its economic goals are completely misaligned, rendering it utterly powerless in the fight against inflation. Whether inflation will be double-digit or not will depend on other circumstances. If the Ukrainian conflict escalates, it will certainly increase. As time goes on, it will likely slow down because the base against which it is calculated will soon be larger, thus statistically reducing it – explains Ljubo Jurčić, a professor at the Faculty of Economics in Zagreb.

With a year-on-year price increase of 9.4 percent in April, Croatia has reached the extreme limit that defines so-called creeping inflation before it transforms into so-called galloping inflation. Why is the former good and the latter bad for the economy? How is inflation calculated at all, and why do some people perceive it as higher while others see it as lower than official data? This is because the rise in inflation in Croatia is largely driven by the enormous increase in energy and raw material prices on the global market, and the recent inflation is referred to as 'imported inflation'.

In such a situation, there are not many instruments that the Government and the Croatian National Bank could independently use to calm it down. Are we as a state powerless to act to stop the rise in prices? And could it happen that Croatia becomes the first country next year where the replacement of the national currency with the euro could occur with at least a slight and sporadic drop in prices…

You will find answers to these and many other questions in the printed and digital edition of the new Lider.