Interview: 2023 – the year of disinflation in CEE?

Disinflation is occurring in Europe, including CE/SEE countries, primarily due to base effects. However, core and food prices continue to exert inflationary pressures, while energy prices have decreased. Some government measures have been implemented to mitigate the impact of rising prices on households. Inflation is expected to decline in 2023, driven by base effects and lower fuel prices. Despite adjustments to government measures, many remain in effect or are extended due to historically high inflation levels.

In the following interview with Casper Engelen and Dorota Strauch, analysts from Raiffeisen Research, it is noted that 2023 is expected to bring disinflation, leading to a significant reduction in yearly inflation figures. However, despite this positive outlook, consumers may still face the impact of inflation in their daily lives due to rising prices of goods and services. The interview explores the causes of inflation and the strategies being adopted by CEE governments to address its challenges.

Casper Engelen: We believe that 2023 will be the year of disinflation, i.e. the pace of price increases will slow down and yearly inflation figures will shrink significantly. This disinflation, which has already started in some CE/SEE countries, is primarily driven by base effects (particularly in fuel and energy prices). This means that the annual price increase compared to pre-war prices was much higher than after the outbreak of the war in Ukraine, because prices soared due to the war a year ago. The drop in energy and fuel prices compared to the prices denoted in the months right after the invasion of Ukraine will contain Consumer Price Inflation (CPI).

Casper Engelen: This decline in the annual inflation rate due to base effects can (and does!) distract from the bigger picture, as monthly inflation rates will remain high despite the decline in overall annual inflation. To understand what we are experiencing in the supermarket, we need to take a closer look and examine which goods and services are experiencing price jumps.

It is clear that inflationary pressures are spreading throughout the CEE region, and we’re starting to feel the effects in our wallets. This means that price increases are now affecting more and more categories of consumer goods and services. At the beginning of the war, only a few types of goods were impacted, particularly energy and fuel. In part, this can be explained by the rising costs of input prices: Producers and retailers face higher costs for fuel, energy, rents, services, goods, and materials and pass these on to the consumers. Consequently, the increased energy and fuel prices are indirectly also driving up the costs of other goods. 

At present, we're witnessing a rise in the prices of various goods, which can be attributed to these indirect effects. This trend is particularly pronounced in the CE/SEE region when compared to the Euro area, mainly because food items represent a more significant share of the “average” consumer basket – that is, the goods that households typically consume each year – and thus affect the CPI data more significantly. A similar situation can be observed in the core goods and services category, where we have yet to see a clear indication of declining price pressures. 

Dorota Strauch: I would say so! Despite adjustments to government measures in 2023, many of them remain in place or have been extended due to the historically high levels of inflation. Throughout 2022, governments introduced various measures to combat inflation, which became more extensive throughout the year. Initially, in the first half of 2022, the sum of government measures did not surpass 1% of GDP. However, currently, the
total value of measures implemented since late 2021 is much higher. Interestingly, for some countries (such as Croatia), anti-inflationary measures have even exceeded the anti-pandemic support provided from 2020 to 2021. While we do see that measures related to fuel, energy, and food are less prevalent in 2023 compared to 2022, many countries still have government measures in place, including tax cuts, price caps or cash payouts. However, it’s important to note that, apart from cash payouts, these government measures will eventually have to be reversed, which may lead to a renewed but hopefully less severe spike in inflation. 

Dorota Strauch: We anticipate disinflationary trends to prevail in 2023, evidenced by declining yearly inflation figures. However, this should not distract from the fact that we will still likely witness broad-based inflation and high monthly inflation dynamics.