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Understanding inflation dynamics: Serbia’s economic landscape compared to the EU and USA

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In Serbia, basic food items constitute approximately 30 percent of the average consumer basket, while in the EU, it’s around 20 percent. Despite recent decreases, inflation remains higher in Serbia compared to the EU and the USA. In March, Serbia experienced a five percent annual inflation rate, whereas it was 2.4 percent in the Eurozone and 3.5 percent in the USA. This discrepancy was examined by Miladin Kovačević and Milena B. Stevović in the latest issue of Macroeconomic Analysis and Trends (MAT).

The authors note that Serbia’s inflation target, at plus or minus 1.5 percent, is higher than that of the Eurozone and the USA, which aim for around two percent. Specific factors contributing to Serbia’s inflation include delayed increases in energy prices, high production costs for food, and strong demand for real estate.

The authors highlight the significant rise in gas and electricity prices in Europe following the crisis between Russia and Ukraine in 2021. While Europe experienced a subsequent stabilization in energy prices during 2023, Serbia faced delayed price adjustments. This delay contributed to Serbia reaching its peak inflation rate later than the Eurozone and the USA, where the peak occurred at the end of 2022.

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Regarding electricity prices, Serbia agreed with the IMF to implement several price increases between 2023 and 2024. These increases are part of efforts to address inflationary inertia, which persists even when structural reasons for price increases are absent.

In addition to energy prices, food prices have also played a significant role in driving inflation in Serbia. Unlike the EU, where food price growth surged in the second half of 2022, Serbia experienced almost double-digit food price growth as early as October 2021. The slowdown in food price growth in Serbia only became evident in the second half of 2023.

Furthermore, Serbia’s higher share of food and basic items in the consumer basket contributes to its overall higher inflation rate compared to the Eurozone. The previous high demand for real estate in Serbia also fueled inflation by generating increased construction and consumption.

Understanding these inflation dynamics is crucial for policymakers to address structural weaknesses and formulate effective economic policies.

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