Since the end of the summer, inflation has started to decrease in Serbia as well. But the fall in inflation is significantly slower than in the Eurozone. Why is this the case?
On the graph, we can clearly see that price growth in Serbia is higher than in the eurozone, and also that the slowdown in price growth started significantly later than in the European monetary union, with a delay of about half a year.
Once again, it is important to say that the reduction of inflation does not mean that prices return to their previous level, but only that prices rise more slowly than in the previous period.
Lower base
One of the reasons is the difference in the level of the base with which price growth is compared. It is year-on-year inflation, which means that the prices are compared with the prices of the same products in the same month of the previous year.
The difference arises in energy prices: with the political cooling between Russia and the EU due to the war in Ukraine, gas prices in Europe skyrocketed during 2022, and with them electricity prices (because gas is not only used for industrial production and heating, as in us, but also for electricity production).
This was not the case with us – the breakdown in the EPS from December 2021, after which we were forced to import large amounts of electricity at high prices, did not immediately spill over into the increase in the price of electricity for domestic consumers, but the state budget received that blow.
As time passed, the prices of energy sources and electricity in the EU started to fall, so now those lower prices are compared to the high prices of a year ago, while in our case it has become the other way around – our electricity prices are now rising because somehow they have to be paid for the costs of previous bad decisions so now those new higher prices are compared to last year’s lower prices. The consequence is that inflation in our country was therefore lower before, and higher now, compared to inflation in the Eurozone.
Greater share of food in the consumer basket
Although the list of goods whose prices are monitored to calculate inflation is the same in Serbia and in the EU, this does not mean that the result will be the same rate of inflation even if the prices grow completely identically.
This seems illogical, but it is true. Namely, the participation of individual products in this basket of goods (weight) differs from country to country in accordance with different consumer patterns.
Unfortunately, Serbia is a poor country, so the share of food and basic foodstuffs in our average consumer basket is higher than in developed countries where salaries are significantly higher. In our country, 33% of the consumer’s basket goes to basic necessities, while in EU countries it is about 20% (although there are also differences between them, where the share of food in consumption in poorer countries such as Bulgaria or Romania is similar to ours).
Since food prices have been growing everywhere in the world faster than average inflation, a higher share of food in the basket will mean a higher overall inflation rate in Serbia than in the Eurozone.
A bigger monetary shock
Here, the structural reasons for differences in the level of inflation are exhausted, and now we move into the domain of economic policy. As can be seen from the monetary aggregate M3, the monetary mass in Serbia has increased significantly more than in the Eurozone. More printed money has its own consequence, higher inflation. This is not only the main reason why inflation is higher in Serbia, but also why inflation in our country is slowing down later, with a delay of a few months. Because in our country the monetary mass has not yet started to decrease, while in the Eurozone this process started at the end of last year.
Tax and social policy
After all, it’s not all about monetary policy, there is something about fiscal policy as well. If the state has high deficits that it covers by borrowing abroad, this will result in additional inflationary pressures.
The state exchanges the foreign currency obtained through borrowing for dinars in order to be able to spend them in the domestic system. And since we have a de facto fixed exchange rate because the National Bank does not allow the nominal exchange rate to change (no matter how much they claim that this is not the case), then more dinars must be issued to maintain currency parity.
Added to these pressures are the ways of state spending, with a very generous increase in current spending by payments to broad sections of the population without income or asset censoring. This is a direct channel of increased consumption, further fueling inflation.
If we want a faster stabilization of prices, we need smarter and more restrictive monetary policies, those that will not be late in tightening monetary conditions because they are waiting for the elections to pass, but also a different fiscal policy that will try to relieve the economy from taxes, put government spending and the deficit back to normal frameworks, as well as to conduct social policy towards the population on the basis of their income and property, and not on the approach of elections.
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