Serbia has entered one of the more unusual phases of its post-pandemic inflation cycle. Headline inflation has fallen sharply enough to suggest that the price shock is largely behind the economy, yet the underlying data tell a considerably less comfortable story. Annual consumer-price inflation slowed to 1.9% in July 2026, after dropping to 2.7% in June, placing it well below the 3% midpoint of the National Bank of Serbia’s target range. But core inflation remained at 4.5%, and the central bank expects headline inflation itself to move back slightly above 4% from September and remain around that level through much of 2027.
That divergence is the central message of the NBS’s August Inflation Report. Serbia is not moving through a straightforward disinflation in which demand, wages, services and goods prices all cool simultaneously. Instead, a powerful fall in food prices has temporarily pulled the headline rate far below several measures of domestic price pressure.
Food prices were 6.1% lower year on year in July, with fruit and vegetables contributing most to the decline after an exceptionally favourable agricultural season. The effect has been large enough to overwhelm inflation elsewhere in the consumer basket. Several months after the expiration of the government’s retail-margin restrictions, the NBS also found little evidence of the rapid price rebound that had once been feared. Roughly 75% of products previously covered by the margin regulation were still below their August 2025 price levels in July 2026.
The underlying picture is different. In June, core inflation excluding food, energy, alcohol and cigarettes stood at 4.6%, and roughly four-fifths of the increase in that measure came from services. Service prices were 6.6% higher year on year, while prices of goods included in core inflation were rising by only about 2.3%. That gap matters because service inflation is generally more closely tied to domestic wages, rents, labour availability and demand than volatile food and energy prices.
The NBS therefore faces an economy in which the headline inflation rate understates the persistence of some domestic pressures. The bank has kept its key policy rate at 5.75%, resisting the argument that the fall in inflation towards 2% warrants immediate monetary easing. The August report makes clear that the current inflation print is not the level around which the bank expects prices to settle.
The projected increase from September is partly mechanical. The comparison base will become much less favourable because retail margins were capped from September 2025, depressing prices during the period against which 2026 inflation will be measured. Energy and other global commodity costs will add further pressure. The NBS consequently expects inflation to stay slightly above 4% through 2027, even as international cost pressures gradually ease.
That forecast explains why the central bank has been reluctant to respond mechanically to the July number. A move from 1.9% to above 4% within a few months would not necessarily represent a renewed inflationary shock in the conventional sense; much of it would reflect base effects and the fading contribution from extraordinary food-price declines. But it would still leave Serbia operating close to the upper part of the NBS target range at a time when domestic demand remains relatively strong.
Credit is expanding rapidly. Total domestic lending to the non-monetary sector was 16.6% higher year on year in June, including 20.0% growth in household lending and 11.7% growth in corporate credit. Real wages were rising by around 7% in April and May. Those numbers do not describe an economy experiencing a broad demand contraction.
The labour market adds another layer. Productivity increased by 4.2% year on year in the second quarter, meaning that part of recent real wage growth is being absorbed by productivity rather than directly translated into unit labour costs. The NBS expects real wage growth to slow and increasingly align with productivity growth during 2027, which is one reason it believes inflation can remain within the target band despite the return above 4%.
Inflation expectations are also behaving more favourably than the headline projection might imply. Financial-sector expectations two and three years ahead were 3.0% in July, close to the centre of the NBS target. Household short-term expectations fell to 10% in June and July, their lowest level since June 2024, while qualitative surveys show households expecting lower inflation over the coming year than they perceived over the previous 12 months.
That anchoring gives the NBS room to look through temporary movements. It also helps explain why policymakers appear more concerned about preventing second-round effects from energy and wages than about reacting to every monthly CPI reading.
The international backdrop remains central. The report assumes that the Middle East energy shock gradually fades rather than develops into a renewed global supply crisis. Under that baseline, the bank sees diminishing imported cost pressure and a gradual normalisation of inflation towards the end of the projection horizon. A renewed escalation would produce a markedly different outcome: the NBS’s pessimistic scenario adds 1.2 percentage points to average Serbian inflation in 2027 and subtracts 0.8 percentage points from GDP growth.
There is therefore little contradiction between 1.9% inflation today and a cautious central bank. The unusually low July rate is real, and households are benefiting from it, particularly through lower food prices. But it is not yet evidence that Serbia has entered a durable 2% inflation environment. The more persistent parts of the price basket are still running considerably faster.
The NBS has reduced its estimate of average inflation for 2026 to 3.2%, from 3.6% in May, acknowledging that the disinflation to date has been stronger than it expected. Yet its forward path remains broadly intact. Food is buying Serbia a period of unusually low headline inflation; wages, services, energy and base effects will determine whether that period becomes structural or proves temporary.
