Inflation in February Disproves the Narrative of Mass Price Increases

The annual inflation rate in February continues to decline to 11.9 percent from 12.7 percent in January, while the prices of goods and services for personal consumption in February record a modest monthly increase of only 0.2 percent. Croatia simultaneously records a decrease in the internationally comparable harmonized consumer price index to 11.7 percent from 12.5 percent in January.

The recorded decline is in line with the expectations of the Croatian Employers’ Association. Although the so-called first estimate does not provide an overview of the price movement structure according to the usual classification, the prices of food, beverages, and tobacco remain unchanged on a monthly basis, which, according to HUP’s calculations, marks the second consecutive month of weaker intensity compared to the beginning of last year. At the same time, service prices barely increased by 0.1 percent monthly, which, overall, indicates that the popular narrative about strong widespread price increases following the introduction of the euro is proving to be incorrect.

Inflationary pressures in Croatia in February are significantly weaker compared to the euro area average, where a monthly increase of as much as 0.8 percent was recorded, and the prices of food, beverages, and tobacco jumped by 1.6 percent monthly. Service prices also rose incomparably stronger in the euro area (+0.9 percent monthly) than in Croatia.

After an average of 10.8 percent in 2022, employers expect the annual inflation rate to drop to 6.5 percent in 2023. The annual inflation rate will continue to decline in the coming months (below 10 percent in April) thanks to falling energy prices, a favorable base effect, and a decrease in food product inflation.

Namely, we have been witnessing a decline in producer prices of agricultural products for some time, which means that the inflation of processed food products has likely reached its peak.

This year, HUP also expects a positive effect from the normalization of global supply chains, significantly more favorable expectations for energy price movements in the second half of the year, and generally a strong slowdown in aggregate demand affecting the prices of goods.

The Crisis is Not Yet Over

All of the above still does not mean that inflation is completely overcome given the continuously strong wage growth, especially in the service sectors, supported by the renewal or significant strengthening of collective agreements in Croatia and across the EU.

Additionally, HUP emphasizes that despite the decline in market ‘spot’ prices of energy due to an exceptionally mild winter and state subsidies, the economy is still paying several times more for gas and electricity under contracts than in 2021. This indicates that the energy crisis is not yet overcome and that sustainable mechanisms are needed to combat its impact.

The price increase of many products last year was somewhat restrained by more favorable contracts for the procurement of energy and raw materials from previous years, while many entered 2023 with significantly less favorable contracts for input procurement. Companies, of course, are looking for ways to amortize price increases through their profit and loss accounts so as not to jeopardize their market position, but last year’s contracted price increases somewhat hinder the easing of food product inflation due to falling prices of food raw materials.

Regarding the implications for monetary policy management, the rising core inflation (5.6 percent in February) supports the ECB in further raising reference interest rates by 50 basis points at the next two meetings in March and May.

At the beginning of this week, the governor of the HNB, Boris Vujčić, emphasized that as long as core inflation remains this high (above the target level of around 2 percent), the ECB should persist in raising interest rates.