Yesterday, the Croatian Statistical Office, DZS, published the latest flash estimate for the CPI in Croatia. According to the release, in May 2023, the CPI grew by 7.9% YoY, while on a MoM basis, it increased by 0.5%.
Due to the entry of Croatia into the Eurozone area, for the last couple of months, the Croatian Statistical Office has been publishing flash estimates for the CPI on the 1st of the next month, for the previous month. These flash estimates have thus far proven to be quite precise, missing the more detailed CPI numbers (released in the middle of the month for the previous month) by 0.1 p.p. or less.
According to the latest estimate, the CPI in Croatia grew by 7.9% YoY, and 0.5% MoM. The MoM numbers, in this case, are more important, as they show us that the CPI is not slowing down that much, but continuing its increase. The reason why the YoY numbers (even though they keep decreasing as compared to the YoY numbers in previous months) seem unreliable is the high base we have already witnessed in this period last year, which by itself could lead to the “reduction” in the overall YoY CPI growth.
Breaking the CPI down, on a YoY basis, Food, beverages, and tobacco increased by 13.5%, Non-food industrial goods without energy by 8.5%, Services by 8%, and Energy decreased by 3.1%. Meanwhile, on an MoM basis, the CPI increased by 1.4% in the Food, beverages, and tobacco category, and by 0.7% for both the Non-food industrial goods without energy and Services. On the other hand, Energy decreased by 2% MoM.
Croatian CPI (February 2013 – May 2023, YoY, %)
Source: DZS, InterCapital Research
The increase across categories, excl. Energy is a trend that we have seen for the last couple of months in terms of the CPI. This is the main reason why we often hear in the news that the current inflation is “sticky”. This would mean that even though the main initial driver of CPI growth, Energy, has started to subside and decrease, both on a YoY and MoM basis, the inflation rate has remained elevated for such a long period of time, that it has spilled over to other CPI categories. This is the main reason why we see continued growth across other categories than Energy.
The problem with this type of inflationary growth is the fact that it is much harder to control, as it is influenced by both wage inflation on the one hand, and increased costs on the other hand. Both of these factors facilitate further growth of prices, as companies try to maintain their usual business operations and margins. This price growth then also influences wage and cost growth as well, leading to a self-fulfilling cycle that is hard to tame.
Of course, the main way that the central banks (in Croatia’s case as part of the Eurozone, ECB) deal with inflation is by raising interest rates, and this is something that has been done by the ECB since the middle of 2022. The interest rates, however, have a delayed response, as increased financing costs and downstream interest rates (on, for example, loans) do not increase immediately, and even if they did they do not affect either households or companies immediately. As such, we are yet to see the full effect of the interest rate hike cycle. If successful, we should see a continued decrease in the CPI numbers in the coming period.