Photo: Miloš Milivojević/TanjugThe prices of food used by the average family have jumped by 40 to 50 percent since February, and official statistics show that year-on-year inflation in September was 14 percent, and the monthly increase in prices was 1,5 percent.
Have you paid attention to the prices of basic foods in stores these days? A liter and a half of fresh milk costs over 200 dinars, a liter of yogurt over 150 dinars, and let's not go on.
"Nova ekonomija" regularly publishes a "barometer" with the prices of a dozen items used in the average household. There you can clearly see that prices have increased by 40 to 50 percent since February of this year, with a few exceptions.
Official statistics show that year-on-year inflation in September was 14 percent, and the monthly increase in prices was 1,5 percent. This is happening in conditions when the government controls electricity and gas prices at an artificially low level at the cost of EPS and Srbijagas losses, which are measured in billions of euros. In addition, government decisions have frozen the prices of several food items. If those prices were set freely, inflation would surely be close to 20 percent.
It should be said that the high rate of inflation is not only a Serbian but also a world phenomenon. The latest data show a jump in inflation in the euro zone from 9,1 percent in August to 9,9 percent in September, while inflation in the EU (when countries that do not use the euro are included) rose to 10,9 percent on an annual basis.
How does the National Bank of Serbia react to all this? By law, its main goal is to achieve and maintain price stability. However, the NBS pursues a de facto fixed exchange rate policy instead of taking into account price stability.
Inflation projection
The NBS publishes quarterly the "Inflation Report", which contains data on market trends and inflation, along with the projection of the inflation rate in the coming period. In the February "Report", the NBS estimated that inflation would reach a maximum of around 8 percent in February-March, and that at the end of the year inflation would drop to only 3 percent (graph on the left). According to the NBS, the probability that inflation will not be in the part of the graph marked with colors is only 10 percent. But that's exactly what happened: the September inflation of 14 percent "fell out" outside the estimated range, and according to the NBS, the probability of that happening was only 10 percent.
The NBS continued to severely underestimate inflation in the May "Report", in which it estimated that inflation will reach a maximum of around 10 percent in June and then fall to around 3 percent by the end of the year (graph on the right). And according to this report, the September inflation of 14 percent was beyond the 90 percent probability according to the NBS estimate.
The last published "Report" was published by NBS in August (chart below). And this is where the NBS failed, as it underestimated the September inflation and at the same time stubbornly stuck to the assessment that a sharp drop in inflation will follow by the end of the year.
Why are inflation projections important? Based on them, the NBS should conduct monetary policy to ensure that inflation is within the projected level of 3 percent, plus or minus 1,5 percent. The basic instrument for this is the level of the reference interest rate, which is currently only 4 percent, which is 10 percentage points below the level of inflation. In simple terms, this policy favors borrowers, since interest rates are below the rate of price growth.
Disastrous consequences
However, inflation cannot be fought with an unrealistically low reference interest rate, even though this is the basic task of the NBS by law. It is a weak consolation that the European Central Bank is also running away from "reality" because the euro is a currency that has the strength of the German economy behind it, and Serbia's weak, highly dependent economy. In the conditions of a de facto fixed exchange rate, the consequences of such a monetary policy are extremely dangerous: imports grow faster than exports, the coverage of imports with exports fell from 76 to 70 percent in one year, and the current account deficit is increasing sharply.
In addition, as a result of missed inflation projections, the NBS loses credibility, which is of great importance in times of crisis. Let's recall: at one time, ECB Governor Mario Draghi emphasized that he would "do everything necessary" to save the eurozone. After that statement, the intervention of the ECB was not even necessary, because the growth of interest rates on Italian government bonds (and not only theirs) stopped. The word of a credible governor was enough to calm the market.
And who will believe Jorgovanka Tabaković after such failures?
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