In anticipation of post-election negotiations and the formation of almost football-like combinations for a majority in the Parliament, few will ask what is happening with the economy, specifically with inflation. Because, yes, the March rate of price growth in Croatia showed that inflation is still not calming down, nor is it globally.
The annual inflation rate in the most important economy (USA) in March was 3.5 percent (0.3 percentage points higher than in February), and when excluding food and energy prices, core inflation was 3.8 percent, the same as in February. As analyzed by John Authers, a financial journalist and author at Bloomberg, the peak of price growth for food, energy, and core goods is definitely in the past, but what is now surprising, and what the markets have overlooked, is the rise in service prices, primarily due to wage increases.
In March, they rose by four percent, the same as in February. This was also reflected in the financial markets. For instance, the 30-year benchmark mortgage bond jumped above six percent, which means that interest rates on mortgage loans, which have not fallen below seven percent, will continue to rise. And when interest rates rise….
The situation is a bit more serious due to the fact that the inflation rate has exceeded estimates and expectations for three consecutive months, leading to a combination of accelerating core inflation, a strengthening dollar, and the absence of the desired decline in benchmark interest rates (Christine Lagarde recently distanced herself from ‘copy-pasting’ the FED’s moves, stating that the ECB is not dependent on the FED but on data, and the data supports the intention for the ECB to lower rates in June).
The difference in the development of inflationary events on the eastern and western sides of the Great Pond essentially lies in the fact that the FED is facing the issue of fiscal dominance over monetary policy. More precisely, monetary policy will cover as much debt/deficit as the Ministry of Finance creates by printing money. As analyst and consultant Hrvoje Serdarušić explains on his blog, the USA currently has a budget deficit of about six percent of GDP (Croatia plans around two percent). The theory of fiscal dominance states that increased government spending can lead to a situation where monetary policy serves fiscal goals instead of focusing on price stability and central bank independence. This can result in increased inflation and a potential loss of confidence in the currency, explains Serdarušić.
That the EU has data foundations for a potential rate cut is also shown by the data for March, where inflation (in the eurozone) fell from 2.6 to 2.4 percent. Inflation in Croatia, however, continues to rise. The annual rate, measured by the harmonized index of consumer prices (HICP) in March, was 4.9 percent. The largest increase in consumer prices on an annual basis was recorded in the categories of restaurants and hotels (10.7 percent), various goods and services (six percent), and alcoholic beverages and tobacco (5.6 percent). Why is inflation so stubborn?
Analyst and financier Neven Vidaković says that in recent months inflation in the EU has fallen because the main drivers of inflation have ceased to operate. – These are rising energy prices and problems in supply chains. The inflation we currently have in the EU is structural inflation arising from deglobalization. This inflation is also exacerbated by a misguided and destructive green transition and cannot be resolved by monetary policy and raising interest rates, which has already pushed the EU into stagflation. Croatia has a significantly higher inflation rate than the rest of the eurozone because we are a small and vulnerable economy. The fact that we have such high inflation has revealed two lies.
The first lie is that the euro will bring stability and low inflation. The second lie is that the National Recovery and Resilience Plan will create a resilient economy. From the data, we see that the NPOO has completely failed and has always been based on incorrect assumptions. The explanations given by Minister Primorac about how we have inflation due to high growth rates are shameful and unworthy of Professor Primorac. Professor Primorac should support such statements with econometric and mathematical models that prove his claims, but neither the professor nor Minister Primorac have or know such models. In other words, Minister Primorac is making Professor Primorac look ignorant – Vidaković succinctly states.
Structural Inflation Increase
Analyst Velimir Šonje is somewhat more optimistic. He claims on the Arhivanalitike portal that if a new external cost shock is not excessively strong, this could prompt the European Central Bank to make its first interest rate cut in June or July, as announced.
—
—
– However, now three factors raise doubts about this scenario. The effect of rising oil and refined product prices is only now spreading through the price system, and it is questionable how the ECB will view this process.
Secondly, the strong rise in service prices (four percent annually and 0.7 percent monthly) raises doubts that personal consumption has begun to recover in the northern EU. This is desirable while the north teeters on the brink of recession, as it may indicate a final departure from the dangerous edge. However, at the same time, this could cool the ECB’s intention to significantly lower interest rates. Thirdly, any such move is risky if the FED does not do the same; otherwise, it could lead to a significant drop in the value of the euro against the dollar. And the head of the American FED, Jerome Powell, is systematically cooling expectations for interest rate cuts in the USA while only good news is coming from the economy there (for example, the number of newly opened jobs in March exceeded expectations).
Powell recently stated that he is not sure whether the higher inflation than expected at the beginning of this year is just a bump in the road downwards and reiterated that more evidence of inflation calming is needed before the FED dares to lower interest rates from the high level of 5.25-5.50 percent, where they currently stand. In Frankfurt, they will certainly keep one eye on what the FED is doing. However, as our inflation rates show – we are a different story.
We do not have a bump in the road but have fallen into structurally increased inflation, which will be further ‘helped’ by the significant rise in public sector wages that is just beginning. There should be no doubt that relatively high inflation will be one of the first concerns of the new government. Which, of course, will not say that this is happening due to fiscal policy that should be sharply corrected if any kind of macroeconomic balance is to be achieved with more normal inflation rates. Otherwise, higher inflation easily turns into a habit – chasing one’s own tail – concludes Šonje.
Thus, it is shown that the fear of HUP members regarding wage growth and its impact on the overall economy (through inflation) is justified. However, voters evidently have both confidence and faith that the first decision of the new government for which they voted will be one that will show the full depth of understanding of the price growth problem.
