Croatian Bureau of Statistic has announced that the prices of goods and services for personal consumption, as measured by the consumer price index (CPI) increased by only 0.1% in 2020.

When breaking down the CPI by main groups by purpose of consumption, the prices of Alcoholic beverages and tobacco increased by 3.6%. Of that Alcoholic beverages increased by 2.4%, while Tobacco prices increased by 3.9%. Food and non-alcoholic beverages coupled with Miscellaneous goods and services follow, with each of the cathegories increasing by 1.9%.

On the flip side, 4 segments observed a decrease in prices, as visible from the graph below. Transport leads with a decrease of 4.4%. To be specific, Purchase of vehicles observed a decrease of 2%, while Operation of personal transport equipment witnessed a decrease of 6.1%.

CPI – Main Groups by Purpose of Consumption (2020)

When observing solely December the prices of goods and services for personal consumption, measured by the CPI, decreased by 0.6% MoM on average. As compared to YoY, they decreased by 0.7%. To put things into a perspective, according to Eurostat, Euro area annual inflation is expected to be -0.3% MoM in December 2020.

Viewed by main groups by purpose of consumption, in December 2020, the highest decrease was recorded in the prices of Clothing and footwear, by 9.5% MoM on average, in the prices of Food and non-alcoholic beverages as well as in the prices of Communication, by 0.7% (in each group) on average, in the prices of Furnishings, household equipment and routine household maintenance, by 0.3% on average, and in the prices of Alcoholic beverages and tobacco as well as in the prices of Restaurants and hotels, by 0.1% (in each group) on average.

Such a trend of low to no inflation has been present for some time in the Euro area and in the US as well. One thing that seems to be a consensus among analysts is the expectation of low to no inflation in the short run (at least next 2 years). It might seem counterintuitive that we are witnessing a trend of no inflation especially given the unprecedented monetary stimulus of central banks. One of the reasons behind the puzzle can be explained by the fact that the increased money supply has, in a sense, not reached the real economy, which can be seen by observing the velocity of M2 money. In other words, the expansion of the money supply has not led to the circulation of money in the real economy, which meant no inflation.