Croatia near top for inflation among EU countries

Split, Croatia

On a monthly basis, the largest price increases were recorded in energy (+2.0%), services (+1.9%), and food, drink, and tobacco (+0.2%).

The annual inflation rate has fallen to 2.3%, the lowest level since June 2021, while the average prices of goods and services for personal consumption in July remained stable compared to June, daily Večernji list reported.

According to the internationally comparable harmonised index, July’s inflation was higher—3.4%—which is no longer the first or second but the fourth-highest in the euro area, where the average inflation was 2.6%.

The euro area has seen a slight increase in inflation in July, prompting renewed suggestions that the central bank should consider abandoning its target of reducing inflation to two percent and instead aim for around three percent.

Olivier Blanchard, one of Europe’s most renowned economists and former chief economist of the IMF, has said that a three percent target would make more sense.

“This is something we should discuss as part of a new strategy,” Blanchard said.

ECB President Christine Lagarde has ruled out such a change during her term until October 2027.

After it was revealed that eurozone inflation slightly increased in July, and another drop in German GDP surprised everyone in the second quarter, the debate has resurfaced about whether Europe should continue to lower interest rates in September, which was confidently expected before this week’s announcement.

In Croatia, food inflation is gradually easing, but persistently high rates are largely driven by service inflation, which is more sensitive to wage increases and the resulting rise in domestic demand, commented Zrinka Živković-Matijević, an analyst at RBA.

Additionally, an extra boost to service inflation comes from foreign tourists’ demand for accommodation and hospitality services.

A strong labour market, along with double-digit growth in nominal wages, presents a key risk to achieving short- and medium-term inflation projections. Inflation expectations among businesses in the services sector remain the only ones above long-term averages, clearly reflecting these risks, RBA analysts added.

They believe that Croatia’s average inflation is stronger than that in the euro area primarily due to the structure of the average consumer basket and stronger price growth in services in Croatia.

However, the difference is expected to gradually narrow partly due to weakening inflationary pressures and partly because of the decreasing room for price convergence of certain product and service groups, given that the process was particularly pronounced in the past two years.

On a monthly basis, the largest price increases were recorded in energy (+2.0%), services (+1.9%), and food, drink, and tobacco (+0.2%). Prices of industrial non-food products excluding energy were lower by 3.2%.