Winners and Losers of Inflation

The Croatian middle class is more resilient and significantly wealthier than is commonly thought, so it is logical that this part of the domestic population does not currently feel the effects of inflation. In Croatia, about thirty percent of the population belongs to the middle class, consisting of individuals with higher education who perform jobs requiring specialized knowledge and have a certain degree of autonomy in their work. This usually corresponds with incomes that are between those of workers and managerial or ownership levels.

– These are mainly professionals in various fields: IT specialists, technicians, small entrepreneurs, clerks, and qualified employees in services whose salaries and fees range from seven to fifteen thousand kuna, forming the most important consumer segment of Croatian society. They buy, use services, and travel. And for the most part, they do not easily give up their established consumption habits. This means that the speed and level of their 'consumer abstinence' will depend on the depth and intensity of the crisis. Only if the crisis escalates and after it escalates will they reduce their consumption more significantly. For now, they are not thinking much about it because they have already given up many middle-class consumption patterns over the past two years due to epidemic circumstances – this is the opinion of Ivan Burić, a sociologist and professor at Croatian Studies who teaches Sociology of Consumption.

Professor Zdenko Babić from the social work program at the Faculty of Law in Zagreb agrees with his colleague and states that the first to start abstaining in any crisis, including inflation, will be members of the lower middle class. They might first, he predicts, give up vacations outside their place of residence and other similar consumption patterns characteristic of the middle class, such as weekly or monthly lunches or dinners out at restaurants, and weekly family outings to cultural events like theaters, performances, cinemas, concerts, or sports events.

– Some will likely have to reduce investments in additional educational activities, either their own or their children’s, and similar non-essential consumption activities. However, the poorest, the lower-income third of the population, will be hit hardest by inflation – believes Babić.

High inflation directly correlates with consumer spending, or the decline in purchasing power. Rising inflation burdens consumers’ purchasing power by slowing down or even negating the growth of nominal wages. Moreover, inflation forces households, especially those with low and middle incomes, to reduce discretionary spending. In other words, most households will cut back on expenditures for non-essential goods and services such as recreation, dining out, etc., emphasized Gordan Kožulj, a director in Deloitte’s Consulting Department.

– All of this would particularly affect low-income households, which would increase social inequality. In other words, spending on luxury products, such as real estate and higher-end cars, will remain at current levels, while spending on basic products will shift to those with discounted prices. Additionally, since early indicators suggest that the tourist season will be successful, this will positively impact higher-class citizens who own property for tourism activities and related services, maintaining a high level of spending on more luxurious products and services – said Kožulj.

Turning Towards Private Labels

Although the middle class, and even the lower middle class, is reluctant to abstain, this does not mean that a large part of our fellow citizens has not already begun to scrutinize every kuna. According to Hendal’s research, some citizens have already started to abstain, and there is a significant list of items they are buying less frequently. Almost sixty percent of respondents in Hendal’s survey conducted for Lider on the impact of rising prices or inflation on purchasing stated that they are already buying less clothing and footwear, small household appliances, and mobile phones and other technical goods. They are also giving up new furniture and household equipment, about half of the respondents are forgoing purchases of snacks and sweets, and they have mostly started to cut back on spending in hospitality establishments. Some consumer behavior patterns can be (pre)seen with the naked eye – such as that in a crisis, consumers will be less likely to purchase exclusive products and will turn to private labels, so-called store brands.

And what does all this mean for retailers and manufacturers? Their workday looks something like this: constantly listening to and monitoring consumer habits, as well as all moves of the competition, and predicting consumption. In short, analysis and futurology. The only good thing is that the lessons learned in the previous recession are still fresh as they left an indelible mark on the mindset of many businesspeople and managers. Thus, with the first signs of market disruptions in supply chains and the first sparks in energy prices, they were on 'alert' status, expecting inevitable inflation. And they know well that inflation is accompanied by recession, which does not come without tectonic disruptions in the market that only the most skilled can adequately prepare for. Experience seems to be Croatia’s winning card as we have matured through the crisis.

And who is already feeling the decline in consumption, and who is preparing for new changes in consumer behavior and how, read in the printed and digital edition of Lider.