Inflation to Return to Croatia in 2017

Total Croatia News

After long period of deflation, prices should again start increasing this year.

The last month of 2016 brought a surprise to European monetary and financial authorities. In December, prices in Germany rose by 0.7 percent compared to November, and the annual rate of inflation reached 1.7 percent, the highest annual rate since July 2013, reports Večernji List on January 5, 2017.

It is expected that the deflationary period will end in Croatia as well. In November, the deflation rate slowed to 0.2 percent, from 0.5 percent in October. This latest deflationary period in Croatia has started in early 2014.

The first estimate for inflation in December is expected in about ten days. Croatian National Bank believes that, due to effects of inflationary pressures from abroad and of the tax reform, inflation could return and reach 1.6 percent this year. Certain signs are already present: we have returned to weekly rhythm of increases in fuel prices, cigarettes are more expensive than last month, cars are also getting more expensive, and an increase in VAT rate in cafes and restaurants will also have an effect. “Direct effects of tax changes on the average annual rate of inflation in 2017 are estimated at around 0.35 percentage points and include the VAT increase on sugar and restaurant and catering services, as well as an increase in excise taxes”, announced the Croatian National Bank.

It is expected that the price of crude oil will this year increase by a third and, if this proves true, inflation could even be higher than the projected 1.6 percent.

Regardless of the fact that consumers are not happy with the return of inflation, central banks consider inflation rate of about two percent a year as their primary objective on which they have been working on for the last three years.

The return of inflation is good news for many investors as well, since it will lead to higher profits from shares and securities, and to higher yields on savings in banks. On the other hand, inflation could erase expected growth in net wages prompted by changes in tax rates and deductions. The increase in net salaries above the expected inflation rate is planned only for the public sector, where the base salary will grow next month by 2 percent, and by the end of the year it will grow further 4 percent.

“For Croatia, it is worse news than for the rest of the EU, because the three-year deflationary period has increased real incomes of population and accelerated personal consumption of citizens and GDP recovery. Although some feared possible negative effects, deflation has not caused changes in the behaviour of Croatian consumers. There was no delay in spending and companies did not postpone their capital investments. Since deflation generated fear, monetary authorities used unconventional measures which have slashed the price of Croatian debt, which also had a positive effect on the growth of our economy”, said economic analyst Zdeslav Šantić. However, the return of inflation will erase all these positive effects.


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