With inflation back on the rise, people have been quick to find something, or someone, to blame. This time, the finger has been pointed at “greedy retailers”, with organized boycotts taking center stage. While the boycott may seem highly coordinated, it may not be so highly logical to address the root causes of inflation. Instead of scapegoating entrepreneurship, it’s important to take a step back and examine the key factors driving this “new wave” of inflation – factors that only a few seem to acknowledge amidst the noise of public outrage.
Inflation is back. Well, it never really went away, but it’s back as a mainstream topic. However, this time we can’t blame the euro, the pandemic or the geopolitical conflicts. So, people have collectively decided to blame the easiest and most immediate target – retailers.
Accusations of cartels, price fixing, loss leaders, doubling profit margins and other similar arguments have been used to point fingers at profit-driven companies, as if being a profit-driven company in a what-should-be market economy is bad. Yet, only a few seem to understand or acknowledge the real causes driving inflation.
Let’s start with a breakdown of inflation since the pandemic. When the economy “closed” during the lockdown, there was suddenly a significant discrepancy between the supply and demand sides, severely damaging supply chains. As a result, for much of 2020, we experienced negative inflation rates, or in other words – deflation. However, with the gradual easing of restrictions, demand began to recover. After being suppressed for months, it surged as people had accumulated savings and were eager to spend. Naturally, the damaged supply side welcomed the recovery in demand but couldn’t keep up. Expanding production capacity, building factories, making investments and hiring new employees take time, leading to another imbalance but this time resulting in rising prices.
The local labor market also experienced shifts. During the lockdown, the tourism and hospitality sectors were effectively shut down, forcing workers to seek jobs in other sectors or even in other countries. This became a problem when the economy reopened, as there was a shortage of workers. This shortage led to either increased wages to attract new employees or the import of cheaper labor, in Croatia both occurred.
However, prices are driven not only by the demand and supply of goods and services but also by the demand and supply of money itself. This brings us to monetary policy and the enormous amounts of “helicopter money” that were printed and injected into the global economy to keep it afloat during the lockdown. This monetary expansion came back to haunt us once the market fully realized and felt the impact of all that extra money.
The ECB, the FED and other central banks all printed money. The HNB did the same, indirectly funding the government through commercial banks. Banks would buy government bonds and the HNB would then purchase that debt from the banks, pumping new money into the Croatian economy. Naturally, as central banks around the world engaged in similar policies, people in other countries also had more disposable income. Once lockdowns ended, international travel resumed, pouring additional demand into Croatia’s relatively small market and creating further inflationary pressures.
Moreover, as if humanity just couldn’t catch a break, the war in Ukraine, related sanctions and other unfortunate events further strained the supply side. Supply chain disruptions drove prices even higher, with inflation culminating in the peak in November 2022, when annual price increase reached 13.5%.
Croatian CPI YoY growth rate (December 2014 – December 2024, %)
Source: Croatian Bureau of Statistics, InterCapital Research
Now, let’s shift our focus to the fiscal policy of the Croatian government. Expansive fiscal policy is justified during times of crisis, such as the pandemic-induced lockdown period. However, the effectiveness of such policies varies depending on their type and implementation. When the economy is booming – as is the case with Croatia, which has been recovering significantly better than the EU average – fiscal policy should ideally be neutral, if not restrictive. Unfortunately, the government seems to hold a different view. Over the past five years, budget expenditures have increased from EUR 18.5bn to EUR 37bn. Instead of focusing on structural reforms, the government has relied heavily on populist measures such as raising wages in the public sector, imposing price caps on selected products and increasing overall government spending.
To clarify, raising public sector wages is desirable, people deserve fair compensation. However, such substantial increases should be aligned with corresponding gains in productivity, which is not the case here. Additionally, it’s important to consider the size of the public sector workforce – around 500k employees, which accounts for roughly one-third of the total employed population. For context, 15 years ago, there were about 400k public sector employees. During that same period, Croatia experienced significant population decline due to emigration and an aging workforce, further highlighting the imbalance.
As for price caps, they rarely produce the desired effects. When the government imposed a price cap on fuel, gas stations were forced to sell fuel to consumers at lower margins, or even at a loss. In order to stay in business, they compensated by increasing prices for other customer segments, particularly B2B clients. Logistics and distribution companies, which typically benefit from wholesale fuel prices and bulk purchase discounts, saw these advantages disappear, resulting in higher distribution costs. This, in turn, contributed to rising prices across the supply chain.
It’s crucial to understand that product prices are not arbitrarily set by “greedy retailers” aiming for the highest possible profits. Instead, prices are influenced by factors such as production and distribution costs, economies of scale, tax policies, market competitiveness and consumer preferences. However, if allegations of unfair market practices hold any truth (they probably do to some extent), one must question the role of AZTN, the Croatian market competition agency. What exactly is AZTN doing to ensure a fair and competitive marketplace if retailers are not respecting these practices?
While AZTN’s role remains unclear, we know what the government is, or isn’t doing. The Croatian economy is approaching its productivity limits, meaning that without significant capital investments or the import of foreign labor the economy cannot substantially increase production. In this environment, rising demand inevitably leads to higher prices.
Capital investments are hindered by high taxes and excessive regulations. If a company has to wait a year, rather than a few months, for a construction permit, and faces high taxes on wages, energy, construction and profits, the incentive to do business in Croatia diminishes. On top of these costs comes Croatia’s high VAT, further exacerbating the issue. This situation underscores the need for a neutral or restrictive fiscal policy, with the government focusing on lowering taxes, reducing regulatory burdens and cutting operational expenses such as the bloated public sector workforce.
Furthermore, much of the money from EU funds is unfortunately not directed toward productivity improvements, competitiveness or the implementation of much-needed reforms. Instead of fostering economic growth, these funds often result in a large influx of new money into the economy without corresponding productivity gains. This imbalance leads to the dilution of money’s value, essentially, inflation. The government should leverage EU funds to reduce taxes and budget deficits, thereby creating a more sustainable fiscal environment.
Finally, while we’ve focused heavily on government policy, it’s worth acknowledging that consumers also play a role in driving inflation. In 2024, Croatia’s retail trade turnover increased by 9.4% in value and 7.3% in volume compared to the previous year. In contrast, Slovenia’s retail trade turnover decreased by 0.6% over the same period, which helps explain why Slovenia is not experiencing persistent inflationary pressures anymore, at least at the extent present in Croatia. This highlights the fact that strong consumer demand exacerbates inflation, especially in an economy operating near its productivity ceiling.
Real seasonally and working-day adjusted retail trade turnover index (Ø 2021 = 100)
Source: Croatian Bureau of Statistics, InterCapital Research
In conclusion, this “new wave” of inflation is the result of GDP growth, increased domestic and tourist demand, rising wages and the expansive fiscal policy, compounded by the government’s reluctance to implement significant tax reforms/reliefs. Therefore, we should not place the blame solely on retailers. Boycotting retailers serves more as a symbolic gesture and a market signal rather than a meaningful solution to the macroeconomic factors driving inflation, which is primarily a monetary phenomenon. While such boycotts might lead to marginally lower retail prices in the short term, the costs will ultimately be transferred to everyone – consumers, retailers, workers, suppliers, creditors and the government. On the other hand, the government benefits from inflation as a hidden tax, allowing it to increase expenditures without facing direct consequences. This is why the government supports boycott, as they divert attention from the root causes of inflation – fiscal mismanagement and structural inefficiencies.
