The consequences of deflation are not yet clear.
After three years, the deflation in Croatia has finally ended. The downward trend in prices that began in 2014 ended in March when fuel, food and beverages prices rose. Although the deflationary period lasted for three years, many people did not feel the decline in prices and wonder whether it will leave any long-term consequences, reports tportal.hr on 26 July 2017.
Deflation is defined as a decrease in prices resulting in a rise in the value of money. Croats are much more familiar with inflation, which happens when prices increase in general. That makes deflation sound like a great thing for everybody's budget. However, it can actually be hazardous for both the economy and individual citizens – when prices start to fall, incomes almost always decrease as well, since people are reluctant to spend, expecting prices to fall even further.
The average deflation rates over the past three years stood at 1.1, 0.6 and 0.5 percent. They were relatively modest so the deflation could hardly be felt. The average price level is calculated from multiple product categories, such as fuel, food, beverages, services and transportation. In the Croatian case, while food prices fell, transport prices rose due to a price increase of the oil which Croatia imports, which somewhat cancelled the overall impact.
This year, prices of food and beverages have risen substantially, which is attributed to the good tourist season. Together with the new increase in transport prices, Croatia has reached a moderate inflation rate of 1.4 percent, which is considered good for the economy.
In Croatia, the deflation was primarily driven by retail chains. There is great competition among them, so a logical move was to lower the prices in order to attract as many customers as possible. In the beginning, consumers reacted by increasing their spending, but they soon noticed the trend of falling prices and stopped buying because they were waiting for prices to drop even further.
When consumption falls, it is difficult to stimulate it again, so businesses have problems with accumulated inventories and fall in turnover, which leads to a reduction in the number of jobs and a further decrease in consumption. A vicious spiral appears which can drag down the whole economy. Fortunately, this scenario was avoided because deflation was mild, so it even had some positive effects.
Economist Guste Santini says that the deflation in Croatia was invisible and that the most visible effect was the reduction of interest rates in banks. “Deflation is a reason for concern for any active economic policy, but the question is whether we have such a policy at all. We are not doing enough analysis, nor do ministries know what the consequences of deflation are. Things just happen to Croatia – the current positive results in the economy are the product of the spread of positive trends from the European Union,” says Santini.
