The Croatian National Bank (HNB) said on Monday the average annual inflation rate this year could rise to 3.5-4%, basing its projection on higher-than-forecast inflation rates in November and December 2021 and the assumption that gas and electricity prices will rise considerably as of 1 April.

The Croatian Bureau of Statistics said today that last December consumer prices were 5.5% higher on the year and 2.6% higher on average for the entire year. December’s 5.5% inflation was the highest since October 2008, when it was 5.9%. In December, consumer prices were about the same as in November.

The HNB said the gradual acceleration of inflation since last July continued in December and that in November it was 4.8% higher year on year.

The increases in November and December were mainly due to food prices, whose contribution was up by 0.6 percentage points thanks to processed and unprocessed food products, the HNB said.

The higher contribution of unprocessed food products, the HNB added, reflects the higher fruit, vegetable and meat prices, while the higher contribution of processed food products is a result of a higher annual rate of price rises of nearly all components, which is related to the spillover of higher food raw materials on the global market and the positive effect of the base period, i.e. the reduction of those prices at the end of 2020.

The 0.3 pp higher contribution of industrial products was due to a higher annual rate of changes in clothes and footwear prices, mainly because seasonal decreases were less pronounced than in December 2020.

In the previous nine months, energy made the biggest contribution to inflation, but in December the biggest contribution came from food at 2.4 pp.

Core inflation rate 4.6%

The annual rate of core inflation, which does not include prices of agricultural products, energy  and administratively regulated products, went up from 3.6% in November to 4.6% in December, mainly due to higher annual growth rates of the prices of some foodstuffs, clothes and footwear.

The average inflation rate in 2021 was 2.6%, while core inflation was 1.6%.

HICP continues to keep up with euro area inflation

Inflation according to the Harmonised Index of Consumer Prices (HICP) continues to closely follow euro area trends and was 5.2% in December, up 0.2 pp from the first inflation estimate in the euro area.

Croatia’s HICP inflation without energy, food, drinks and tobacco was 2.6% in December, the same as in the euro area.

Croatia’s HICP inflation in 2021 was 2.7%, up from 2.6% in the euro area, while without energy, food, drinks and tobacco it was 1.3%, down from 1.5% in the euro area.

Enough negative risks, inflation might exceed new projection

In December, the HNB Council projected that the average annual inflation this year could stay the same as in 2021, but the 2021 inflation forecast made then was 2.4%, with the assumption that electricity and gas prices did not change, or 3% if those prices increased by 10%, the data on inflation for November and December somewhat exceeded those forecasts, the HNB said.

The first quantifications of the expected gas and electricity price rises have appeared in public, as have announcements of measures to cushion them, and they have considerable implications for inflation forecasts, the HNB said.

However, it added, the uncertainty is still pronounced as structural changes in the economy reduce the reliability of available economic models.

The latest forecasts indicate that the average annual inflation growth this year could be 3.5-4%, assuming that gas prices go up by 10-30% and electricity prices by 5-15%, and it is still expected that the annual inflation rate will gradually decrease towards the end of the year, the HNB said.

A higher-than-forecast inflation projection for this year is a result of higher-than-forecast results in November and December and the assumption of a somewhat stronger increase in gas and electricity prices as of 1 April, the HNB added.