Economy in 2023: Inflation Still High, Target Level of 2 Percent Only by 2025

After reaching 10.8 percent in 2022, inflation has remained at elevated levels this year, expected to be around eight percent, with a significant slowdown anticipated next year, while the targeted level of around two percent should be achieved by 2025.

Last November, inflation peaked at a record 13.5 percent, after which it began to gradually slow down, with double-digit levels persisting in the first three months of this year, during which citizens also tried to adjust to the new currency – the euro.

According to data from the Croatian Bureau of Statistics (DZS), the annual inflation rate in April was 8.9 percent, in May 7.9 percent, in June 7.6 percent, in July 7.3 percent, but in August it was 7.8 percent, marking the first interruption of the trend of slowing annual growth after eight months.

During the tourist season, the media reported almost daily on price increases along the Adriatic, citing examples such as a scoop of ice cream costing three euros or pancakes for four euros. Finance Minister Marko Primorac stated at the end of June that such price increases are concerning, as the continuation of such trends could seriously jeopardize both the tourist season and the economy in general.

Thus, although June data indicated a continuation of the trend of reducing inflationary pressures, Primorac assessed at that time that the strength of that slowdown was ‘something that could have been much better’, appealing to all business entities to responsibly determine prices.

After the first estimate of inflation for August showed its first acceleration after a long time, Prime Minister Andrej Plenković stated that it is not justified to raise prices if input costs do not increase, given that the government has limited energy prices.

Limited Prices of Electricity, Gas, Fuels, and Basic Product Basket

He also stated that additional efforts would need to be made to reduce inflation, which was soon concretized in meetings with representatives of the largest retail chains regarding price reductions on certain products, and ultimately, the government expanded price limits to 30 basic products as part of the fifth package of measures to protect households and the economy from rising prices, adopted in mid-September.

Thus, in addition to earlier price limits, such as for sunflower oil, sugar, and whole chickens, the price of a kilogram of lemons, three-ply toilet paper, five kilograms of potatoes, a kilogram of carrots, milk chocolate without additives, a kilogram of chicken or turkey sausages, the price of a kilogram of boneless pork neck, beef neck with bone, etc., is now also limited.

The entire new package of measures for the period from October 1, 2023, to March 31, 2024 is valued at 464 million euros, in addition to the existing 551 million euros that the measures from the previous package are worth, which are in effect for one year, until the end of March next year.

As part of it, for a period of six months, ending at the end of the upcoming March, the price of electricity for citizens, the economy, and institutions will remain at the same regulated level as in previous packages, for which the state allocated 288 million euros in the case of the recent package.

Through the spring package, which was in effect from April to the end of September this year, the state secured 1.18 billion euros to mitigate the rise in energy prices. Among other things, it was defined that the price of gas for households, the public and non-profit sectors, and for all micro, small, and medium-sized enterprises with an average annual consumption of up to 10 GWh would not change until April next year, with the total value of that measure amounting to 150 million euros.

Also, until April next year, the unit price of thermal energy for all thermal systems remains unchanged. The value of the measure is 267 million euros, and it applies to 159,000 customers (e.g., in Zagreb, Sisak, Zaprešić, Velika Gorica), covering 98 percent of the delivered thermal energy.

As is known, the government has been limiting the prices of basic gasoline, diesel, blue diesel, as well as the prices of gas for tanks and gas for bottles for a long time.

Significant Slowdown of Inflation Next Year

After an increase in August, inflation returned in September to a trajectory of slowing its annual growth rate, and after September’s 6.7 percent, the trend continued in October (5.8 percent) and November (4.7 percent), while data from DZS and Eurostat for December of this year are still awaited.

Among bankers and economic analysts, there is a prevailing view that inflation, after around eight percent in 2023, will significantly slow down next year, and the targeted level of around two percent should be reached by 2025.

The government’s projections are in line with this, according to which the inflation rate in 2024 should be 3.1 percent, and then slow down to 2.4 percent in 2025 and 2.2 percent in 2026.

Chief economists of the four largest Croatian banks predict that inflation, after this year’s 8.1 percent, will slow down to 3.6 percent next year.

Although the expected 3.6 percent, with a narrow range of forecasts between 3.3 and 3.8 percent, is significantly lower than the inflation for 2023, chief economists believe that strong domestic demand will keep inflation in Croatia at a slightly higher level than the euro area average.

Estimates of inflation growth for this and next year were recently revised downwards by the Croatian National Bank (HNB), which states that inflation growth measured by the harmonized index of consumer prices (HICP) will amount to 8.4 percent this year and four percent next year. According to HNB, inflation will be 2.5 percent in 2025 and two percent in 2026.

Risks to inflation movement projections relate to the geopolitical situation, in terms of potential consequences of armed conflicts in Ukraine and the Middle East.