Next Thursday, September 14, we will bring a comprehensive aid package for the most vulnerable and enable citizens to maintain their standard,’ said Prime Minister Andrej Plenković after the regular meeting of the HDZ Presidency on Monday. He added that the issue of inflation was discussed and ‘we also had a meeting with the governor of the HNB’.
In response to a question about inflation and the package, Plenković said: ‘Those who took advantage of the crisis, the context of favorable energy prices, did not act well. It is important that the packages help the most vulnerable… We can fight inflation with monetary policy measures, by raising interest rates or fiscal policy, which the Government is doing, and that is taxation. Last year, we introduced an additional profit tax and collected about 235 million euros. The state can redistribute that to those in need, for example, retirees’.
Indecisive Politicians
A careful reading of what the Prime Minister and HDZ leader said raises concerns. First, he did not promise when and how inflation in Croatia, which has risen to a dangerous 7.8 percent, will start to decline. Instead of an anti-inflation package, a redistribution aid package for the most vulnerable will be adopted next Thursday. In the continuation of the same sentence, the Prime Minister shifts from the vulnerable to all citizens, announcing ‘maintaining standards’ for them.
If he manages to maintain the standard of the average citizen with inflation of nearly eight percent, he will deserve the Nobel Prize in Economics. It would be like some alchemist finally finding a way to turn iron into gold. Second, in the statement, there is a sentence that a meeting was held with the governor of the HNB, but without details. What Governor Boris Vujčić said can be inferred from his other statements. They boil down to the fact that the European Central Bank (ECB) is indecisive about whether to raise interest rates further to calm inflation. By introducing the euro, monetary sovereignty was handed over to Frankfurt, where those who have never experienced inflation in their lives predominate (except for the governors of Croatia and Slovenia, who warned about a revived price increase at meetings two years ago). In the fight against inflation, the problem is not if monetary tightening is too strong, but if it is too weak. And it seems that the tactic of ‘let’s wait until spring and see’ will be applied.
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Third, Plenković trivializes the role of fiscal policy in the fight against inflation. He reduces it to the introduction of a tax on excess profits and the distribution of the collected 235 million euros. My people, the main lever of fiscal policy is reducing state spending to calm the payment-capable demand! This the Prime Minister omits. Instead of falling, state spending is rising and thus further fueling inflation. If the Banski Dvori really wanted to make a serious contribution to breaking inflation, a rebalancing with a reduction in state spending of, say, ten percent would have been made. Namely, inflation will not remain at seven or eight percent. That is a level after which acceleration usually follows.
Confused Economists
It is symptomatic to notice that politicians are not the only ones who are struggling to understand inflation. Thus, there was astonishment that despite rising inflation, ‘citizens are spending’. Of course, they are spending when it is clear to them that they will be able to buy less with today’s money tomorrow. Inflation, along with other unchanged conditions, stimulates consumption. Unlike deflation, when the consumer postpones purchases because it is likely that prices will be lower in the future.
It is also interesting to ‘discover’ that today’s inflation is a result of inflationary expectations, not actual cost increases (of energy at the beginning of the Russian aggression against Ukraine). Of course, after the first phase, a phase of psychological inflation follows. One definition of inflation is that it is self-inflating. It turns out that the media should remain silent about the announcement of price increases, and inflation would calm down. And this in conditions where a real wage growth of five percent is predicted, new investments fueled by money from EU funds, when a thirteenth pension is announced before the elections next year, or when the protection of the standard of all voters is promised. What should the price formation referent in Kaufland, Lidl, Studenac, or Konzum conclude from all this? Well, of course, he would conclude that purchasing power will not decrease and that prices should be raised.
Some optimists hope that the fear of losing in the parliamentary elections could make the HDZ government more serious in the fight against inflation. Because the last time the HDZ lost an important factor was voter dissatisfaction with the decline in standards. But that was a recession. The examples of Turkey and Hungary, where inflation has been raging for a long time, and political leaders, President Recep Tayyip Erdoğan and Prime Minister Viktor Orbán, remain in power despite this, indicate that one should not hope for breaking inflation in Croatia due to the super-election year.
