The Difference Between Inflation in Croatia and the Euro Area Average Has Decreased

According to the first estimate from Eurostat, inflation in Croatia measured by the Harmonized Index of Consumer Prices (HICP) slowed to 4.3 percent in May 2024 (down from 4.7 percent recorded in April), reflecting a decrease in inflation across all major components except energy.

The slowdown in inflation is also noticeable when observing the national Consumer Price Index (CPI), which does not include consumption by foreign guests and institutional households (such as educational, health, religious institutions, etc.). Inflation measured by the CPI slowed from 3.7 percent in April to 3.3 percent in May. At the same time, overall inflation (HICP) at the euro area level slightly accelerated (from 2.4 percent in April to 2.6 percent in May), thus reducing the difference between inflation in Croatia and the euro area average in May, according to the comment from the Croatian National Bank (HNB) on the inflation data released today.

The Harmonized Index of Consumer Prices (HICP) is calculated according to a harmonized approach that allows for a comparable measure of inflation for European Union member states, while the Consumer Price Index (CPI) represents the national consumer price index. Both CPI and HICP are calculated based on the same representative basket of goods and services. The main difference lies in the population coverage (HICP includes total consumption by institutional households and non-residents on the territory of Croatia, and this consumption is not included in the national consumer price index.

Slightly Slower Inflation of Services

Lower energy prices and other raw materials compared to the peaks recorded in 2022, along with the removal of supply chain disruptions, continue to positively impact the inflation of food and industrial products, whose slowdown continued in May. In May, the slowdown in food price inflation was particularly strong (to 3.7 percent from 4.9 percent in April, HICP). At the same time, inflation of service prices also slightly slowed, although it remains significantly higher than other major components of inflation (standing at 7.8 percent). The persistence of price inflation is partly due to their sensitivity to wage increases in conditions of strong demand for hospitality and accommodation services. On the other hand, energy price inflation accelerated in May compared to April.

The change in the annual inflation rate from month to month – from 4.7 percent (HICP) in April to 4.3 percent in May – depends on the change in retail prices compared to the previous month (i.e., current inflation), but also on the monthly rate of price change in the same month of the previous year (the so-called base effects).

The slowdown in inflation achieved in May 2024 thus reflects a favorable base period effect due to the high price increase in May of last year, in conditions of continuously low current inflationary pressures. Favorable base effects are noticeable in all major components, except for energy, given that the decrease in energy prices in May 2023 was much more pronounced compared to May of this year. Favorable base effects had the most impact on the slowdown of annual service price inflation, although this was mitigated by elevated current service price inflation. Services are the only component whose monthly inflation is above its historically usual value.