Employers predict inflation ‘might culminate’ in early 2023

NEWS 17.01.202320:03
Pixabay / Ilustracija

The Croatian Employers Association (HUP) on Tuesday commented on the latest statistics showing that the inflation rate in December was 13.1%, noting that it was in line with its expectations and that inflation could culminate at the start of this year.

Consumer prices in Croatia increased by 13.1% in December 2022, while inflation for the entire year was 10.8%, the Croatian Bureau of Statistics (DZS) reported earlier in the day.

The latest figures show that the rise in consumer prices has slowed down on an annual basis after months of record-high annual inflation, with the latest record of 13.5% registered in November 2022.

“The annual inflation rate in December 2022 dropped to 13.1% from 13.5% in November, in line with our expectation of a significant decrease in prices of oil products and a smaller increase in prices of energy products, owing to government subsidies,” HUP said in its comment.

The annual inflation rate could, nevertheless, culminate at the beginning of this year.

The growth of prices of services basically reflects an incomplete recovery of aggregate demand following the abating of the coronavirus pandemic, a labour shortage and a certain delay in adjustment to last year’s increase in input costs.

If the volatile prices of food and energy products are excluded, inflation grew to 9.7% (year on year) from 8.9% in November, which indicates that inflation will stay at high single-digit levels in the foreseeable future, HUP said.

Average inflation in 2023 7.5%

“After an average of 10.8% in 2022, in 2023 we expect the annual inflation rate to drop to 7.5%,” HUP says, noting that after a possible increase in January, the annual inflation rate would probably go down in the following months.

HUP expects a lower monthly inflation dynamic in line with the decline in aggregate demand, stabilisation of energy prices, normalisation of supply chains, and a certain drop in prices of food raw materials.

However, a high degree of uncertainty regarding energy prices, currently on the decline owing to a very mild winter across the EU, will continue.

Despite government subsidies, electricity prices are still around four times higher than they were before 2021, which is a symptom of a still deep, long-lasting energy crisis. This summer a new race will begin between EU members to fill their gas storage facilities and the European Commission needs to secure new mechanisms to stabilise energy prices, HUP notes.

HUP expects further interest growth in euro area

HUP also says that a drop in inflation in the euro area in the first half of the year could trigger speculation about the end of the cycle of growing reference interest rates of the European Central Bank but notes that core inflation in the euro area and Croatia will stay significantly above the ECB’s target of around 2% in the foreseeable future.

Fiscal expansion and wage growth have continued, which can affect price expectations, HUP says.

“For that reason one can expect a further growth of interest on deposits to up to 3.25-3.50% by the summer in the fight against inflation. Interest growth with the simultaneous planned reduction of the ECB balance of €15 billion a month as of March also contributes to the worsening of financing conditions in a situation when the need for financing is growing strongly in many countries of the euro area,” HUP says.