Central bank Governor Vujčić warns inflation is concerning, but says energy prices are driving increase

Boris Vujčić, governor of the Croatian National Bank, warned that Croatia’s inflation rate of 5.8 percent is concerning, but said the latest increase is largely being driven by rising energy prices rather than domestic demand.

Speaking on HRT’s main evening news program on Sunday, Vujčić said it is important to distinguish between imported inflationary pressures and domestic factors, particularly ahead of the tourist season.

“When it comes to inflation, it is important to keep in mind that the current increase is entirely a consequence of rising energy prices,” he said.

Vujčić noted that the headline inflation rate eased from 4 percent to 3.7 percent, while core inflation remained unchanged. Goods inflation, he said, is currently negative at minus 0.7 percent, meaning prices for many goods are falling.

“The long-term issue remains services inflation,” he said, noting that prices in the sector rose from 7.2 percent to 7.3 percent. “This includes the prices of tourist services.”

While describing the 5.8 percent inflation figure as worrying, Vujčić stressed that much of the pressure comes from abroad.

“We need to distinguish imported inflation, which is the result of shocks in global supply, from domestic pressures we have experienced for a long time, such as rising service prices,” he said.

Addressing why Croatia currently ranks among European Union countries with higher inflation, Vujčić argued that a broader perspective tells a different story.

“If we look at cumulative inflation from 2021 to today, Croatia’s rate is lower than all comparable Central and Eastern European countries,” he said. “Over the longer term, the situation is not such that we have the highest inflation rate.”

He attributed part of the recent increase to the gradual removal of government subsidies and price caps on energy.

“We maintained restrictions and subsidies on energy prices for longer,” he said. “When those measures began to ease, prices increased more quickly.”

Vujčić said service-sector inflation remains the key domestic challenge but expects price growth to gradually slow as demand weakens and wage growth moderates.

“I think we will soon see this inflation rate begin to decline,” he said, adding that lower domestic and foreign demand, along with slower wage growth this year, should help ease price pressures.

Discussing the potential impact of the crisis in the Middle East and rising energy costs, Vujčić warned that a worst-case inflation scenario remains possible.

“If this situation continues for months, we will move closer to the worst-case scenario,” he said. “If it is resolved relatively quickly, we will return to the base scenario, where inflation is projected at 4.6 percent in 2026.”

He added that a prolonged energy crisis would likely weigh on economic growth, though Croatia continues to outperform the broader eurozone economy.

“We are still in a good position in terms of growth, expanding three times faster than the eurozone average,” he said.