Željko Lovrinčević: Inflation will spill over into 2025, and the gap compared to the EU average will be even greater than today

When most articles put the figure of 1.6 percent inflation in the headline for September, it is easy to conclude that we have finally won the battle against rising prices. According to data from the DZS, that is, according to the domestic consumer price index, in September compared to September 2023, prices were on average 1.6 percent higher, while compared to August, they were on average 0.3 percent higher.

Thus, the price increase has dropped below the desirable threshold of two percent! Therefore, the general conclusion is that the trend of decreasing year-on-year inflation measured by the consumer price index, which has been uninterrupted since September 2023, has continued – the year-on-year inflation rate for September is lower than that of August (1.8), July (2.2), and June (2.4 percent).

It is significantly less emphasized that Eurostat’s data on the first estimate for the harmonized consumer price index in the euro area for September shows that prices in Croatia, compared to the same month last year, have risen – three percent! At the same time, the average year-on-year inflation rate for September in the entire eurozone is higher by 1.8 percent. The difference is not negligible. It arises from the inclusion of non-residents. More precisely, the internationally comparable and well-known harmonized consumer price index encompasses total household consumption and non-residents on the economic territory of the country (read: tourist spending from which we live), and this consumption is not included in the national consumer price index.

So, should we rub our hands in joy or not? Željko Lovrinčević from the Economic Institute usually ‘turns off the light’.

– The differential between the rate of price growth in Croatia and the eurozone average remains at around 1.2 percentage points, so there is no reduction. Moreover, it is certain that in October, with the expected increase in energy prices, prices will rise further. This has already happened in the EU, as markets have been liberalized, meaning that most member states have withdrawn subsidies for energy. We will have to do the same, and this difference will increase further. Thus, inflation will spill over into 2025, and the gap compared to the EU average will be even greater than today. Almost three years after the introduction of the euro, this differential is still extremely high, despite all analysts, especially at the Croatian National Bank, assuring only a short-term effect of the new currency.

Croatia continues to record high inflation and a gap compared to the eurozone and the entire EU average. Most countries that adopted the euro earlier had an inflationary effect for up to a year, and as inflation spills over into the next year, Croatia will feel the consequences of euro adoption for four to five years. When it comes to our domestic index, which is not internationally comparable, it is evident that the main component of pressure to reduce inflation is energy prices. Given the geopolitical events, there could be an increase in those prices in October as well.

However, it is certainly interesting that the drop in energy prices, primarily oil (gas and electricity show less fluctuation), has not spilled over into service prices (services increased by 6.2 percent year-on-year in September, food and beverages by 3.2 percent), which are already less represented in the domestic index. HIPC covers them in more detail, and precisely because of services, whose prices continue to rise, inflation will rise in the first quarter of next year. The EU will also go through this because some member states partially draw gas from pipelines that go through Ukraine, but the gas transit contract ends on December 31, and due to pressures, it is unlikely to be renewed. However, this will be a short-term effect while Croatia expects an increase in both gas and electricity prices, and this growth dynamic will contribute an additional 0.4 percentage points to the existing inflation – explains Lovrinčević.

Thus, the domestic price index will revolve around two percent (the current 1.6 percent plus the contribution of rising energy prices) while HIPC will be above three percent. He also warns that monthly inflation is accelerating, which will together give a new dynamic to the overall price growth and the difference compared to the European average. This is not the case for most other members. However, whatever various statistics show, the fact is that the cumulative price level will not decrease; we have stepped into a new normal that we need to get used to. Given the silence with which we accept inflation figures, it seems that we already have.