Croatia Records Higher Inflation but Also Strong Industrial Recovery

Inflation in Croatia is accelerating again, primarily due to strong growth in energy prices, while industrial production simultaneously shows signs of recovery. According to data published in the latest Weekly Analysis by PBZ, national inflation in August reached 4.1 percent, while industrial production in July increased by 7.2 percent year-on-year. The bank expects an increase in the European Central Bank’s interest rates this week, on September 10.

Inflation in the euro area rose to 3.3 percent in August, up from 2.9 percent in July, marking the highest rate since September 2023. In Croatia, the harmonized inflation rate increased to 3.7 percent, while according to the national index, it accelerated to 4.1 percent. However, the overall inflation growth has not yet been accompanied by a strengthening of core price pressures. Core inflation in the euro area slowed from 2.5 to 2.4 percent, while in Croatia the decline was even more pronounced – from 3.4 to 2.7 percent.

The main reason for the acceleration of inflation is energy. In the euro area, the annual growth of energy prices accelerated from 10.3 to as much as 14.3 percent, while on a monthly basis, energy prices rose by 2.9 percent. In Croatia, the harmonized inflation of energy prices reached 16.9 percent, compared to 11.5 percent in July, while according to the national indicator, it accelerated to 17.4 percent.

PBZ warns that energy price inflation in the euro area could remain in double digits until February next year, especially due to tensions in the natural gas market. In Croatia, they believe that the eventual withdrawal of state support measures will also play an important role.

Food No Longer Pushes Prices Upwards

Unlike energy, food prices are currently not creating strong inflationary pressure. In the euro area, food price inflation remained at 1.2 percent, the lowest level since June 2021, while food prices stagnated on a monthly basis.

In Croatia, the situation is even more favorable. The growth of food prices slowed to just 0.3 percent according to the harmonized consumer price index, the lowest level since April 2019, and to 0.1 percent according to the national index, the lowest since February 2021. Prices of unprocessed food fell by 0.4 percent, the first decline in the last two years. However, PBZ expects that a slight increase in food prices could appear in the coming months due to the indirect effect of higher energy costs.

On the other hand, prices of industrial products excluding energy in the euro area accelerated from 0.9 to 1.2 percent, the highest rate in the last two and a half years. PBZ assesses that part of this growth is likely related to higher prices of technological products in the context of strong development of artificial intelligence. In Croatia, however, prices of industrial products excluding energy fell by 1.1 percent according to the harmonized index, and by 1.3 percent according to the national indicator.

Services Still Expensive, but Pressure Eases

Inflation of service prices in the euro area has slowed again, from 3.3 to three percent, while in Croatia, the harmonized inflation of services fell to 5.6 percent. This is the lowest level since March 2022. According to the national indicator, the growth of service prices slowed from 8.5 percent in July to 7.2 percent in August. PBZ links this trend to weaker pressures in personal services and hospitality, as well as the base effect of the housing component.

PBZ’s conclusion is that the current acceleration of inflation is entirely due to energy, while the transmission to core prices is currently limited and there are no signs of so-called second-round effects. Such movements, according to the bank’s assessment, are still in line with the expected increase in ECB interest rates on September 10. At the same time, the acceleration of inflation reduces the room for further increases thereafter, unless new tensions in the Middle East cause an even stronger rise in energy prices.

Industry Shows Signs of Recovery After a Weak Start to the Year

While inflation remains a problem, significantly more positive signals are coming from the industry. After relatively weak activity in the first half of the year, when total industrial production was one percent lower than in the second half of 2025, and 0.3 percent higher than a year earlier, a strong recovery was recorded in July.

Total industrial production in July increased by 6.8 percent compared to the average of the previous quarter, and by 7.2 percent year-on-year. The manufacturing industry accelerated its annual growth to 6.8 percent, while energy supply jumped by 10.9 percent.

Intermediate products recorded particularly strong growth of 16.6 percent for the second consecutive month, while energy production increased by 9.1 percent. After three months of decline, the production of non-durable consumer goods also recovered, rising by 1.7 percent in July.

However, not all segments of the industry are on an upward trajectory. The production of capital goods, after strong growth last year, has been almost continuously declining this year, with a decrease of 7.4 percent in July. An even more pronounced problem is the durable consumer goods, whose activity has been declining for ten months, and in July was 6.3 percent lower than a year earlier.

Despite this, PBZ assesses that along with previously positive data from retail and the July surge in industrial production, there are signals that economic activity in the third quarter could trend more favorably. This would represent an improvement after the decline in gross value added in the industry, or stagnation in the manufacturing industry in the second quarter.