RBA: Service prices will be one of the key influences on the inflation rate

Analysts Raiffeisenbank Austria (RBA) in their commentary on the latest inflation data in Croatia emphasize that inflationary pressures in July were relatively elevated, and they do not rule out that August could bring a slightly higher annual rate of the consumer price index, while also warning of the risk of a price growth spiral due to rising wages.

The State Bureau of Statistics announced on Monday that the prices of goods and services measured by the consumer price index in July were 7.4 percent higher compared to July 2022, while they were on average 0.3 percent higher compared to the previous month.

If the final announcement on August 17 confirms the mentioned changes in the consumer price index, the slowdown in the growth of consumer prices that began at the end of last year would continue – RBA points out.

As they state, in line with expectations, a strong contribution to price growth continues to come from rising prices in the food category. The estimated annual price rate in the Food, Beverages, and Tobacco category was relatively high at 11.5 percent. On a monthly basis, prices in that category increased by 0.3 percent according to the first estimate.

– We assume that only food prices, despite a slight slowdown, recorded a double-digit growth rate during July and that due to their high share in the basket, they had the largest contribution to inflationary movements in the observed month – RBA says.

On the other hand, for the third consecutive month, energy prices recorded a decline in average prices. Thus, despite a monthly increase of 1.7 percent, they were 1.7 percent lower compared to July 2022.

The harmonized index indicates an increase in consumer prices of 8.1 percent

The harmonized consumer price index (HICP) in July recorded an annual increase of 8.1 percent, which is 0.2 percentage points lower than in June.

– As expected, the higher growth of HIPC compared to the consumer price index is largely due to the fact that the harmonized consumer price index takes into account the consumption of foreign guests. Therefore, the share of hospitality services, especially accommodation services, is higher in HICP compared to the consumer price index – RBA explains.

The price growth in the euro area in July slowed to 5.3 percent, down from 5.5 percent in June. Among the euro area countries, only Slovakia recorded a higher annual inflation rate than Croatia at 10.2 percent, according to Eurostat data.

– Inflationary pressures remain relatively elevated. According to short-term expectations, we do not rule out that August could bring a slightly higher annual rate of the consumer price index. A continuation of the slowdown is likely in September and in the last quarter primarily due to the base period effect and falling energy prices – RBA estimates.

However, they warn that strong nominal wage growth, which already exceeds the inflation rate, along with a solid tourist season, boosts demand and supports further strengthening, especially of service prices, opening up risks of a price growth spiral due to rising wages.

– It has been relatively low so far, but the fact remains that in conditions of a strong labor market, the expected growth of real wages could support or raise demand and thus encourage further price growth of certain products, especially services, so inflation in such a macroeconomic environment could prove to be more stubborn and persistent – RBA notes in their commentary.

They estimate that food price growth should also slow down towards the end of the year, but at the level of the entire year, under the influence of extremely elevated rates in the period from January to June (potentially until September), they will have double-digit growth for the second consecutive year, thus again having the largest contribution to the overall consumer price index.

– The administrative restriction on the prices of certain food products according to the Government’s decision will remain in place until April 1, 2024. However, it should be noted that the average level of food prices already exceeded the EU average by 1.1 percent in 2022, while average energy prices are far below the average of the single European area, at a level of 54.4 percent of the EU average. Service prices will be one of the key determinants influencing the core inflation rate – RBA concludes.