ECB and HNB: Price Increase Due to Euro Introduction 0.4 Percentage Points

The impact of the euro introduction on prices in January and February was relatively mild, amounting to 0.4 percentage points, which does not deviate from the experiences of other countries that have adopted the euro, shows a preliminary analysis by authors from the European Central Bank (ECB) and the Croatian National Bank (HNB).

The analysis was published in a blog titled Has the euro changeover caused extra inflation in Croatia.

The authors of the blog Matteo Falagiarda, Christine Gartner, Ivan Mužić, and Andreja Pufnik found that the January rates of price growth for goods were in line with historical patterns over the past ten years. In contrast, service prices in January 2023 increased on average more than in previous years. In February, however, none of the inflation components significantly deviated from historical averages, reported HNB on Tuesday.

The authors emphasize that the official growth rate of the harmonized index of consumer prices in January compared to the previous month was only 0.3 percent, and in February 0.2 percent compared to January, placing Croatia among the countries with the lowest monthly price growth rates in the euro area.

From the analysis of microdata on retail prices, it was observed that the share of attractive prices (attractive prices are formed at levels such as (‘0.99’)) significantly decreased, from about 98 percent in kuna to about 45 percent in euros, as a direct reflection of the fact that many prices did not change in January, so expressed in euros they were no longer at attractive levels (e.g., ‘0.99’).

Namely, as much as 65 percent of prices remained unchanged in January compared to December, and of the remaining 35 percent, 25 prices were reduced, as some retailers rounded prices down when converting from kuna to euros, according to HNB.

The impact of the euro introduction on inflation perception and inflation expectations was also analyzed. Contrary to previous experiences of euro area member states where inflation perception mostly increased upon the introduction of the euro, in Croatia this perception even decreased in January compared to December and remained stable in February, while inflation expectations fell sharply in both months. The decrease in perceived inflation was most influenced by the reduction in energy prices, which outweighed any potential negative effect of the euro introduction on inflation perception, the central bank stated.

The authors conclude that despite a more challenging inflationary environment, the impact of the euro introduction on consumer prices in Croatia has so far been relatively mild and in line with the experiences of other countries that have already adopted the euro as their official currency.