Serbia Watch: Food prices pushed annual inflation to 4.3% in August

The very tranquil monthly inflation sentiment since May was interrupted with the surprising upsurge in the August data (+0.9% mom). The main culprit behind this dynamism were the prices for food and non-alcoholic beverages (+2.0% mom), after they had fallen by 0.9% mom in July. The main triggers were meat, fruit and vegetable prices. In fact, the increased demand for meat came from different events during the summer months, whose organisation was shifted until after the restrictive measures had ended and due to the outlook of a new wave of Covid starting in autumn. Besides increasing demand, the costs of meat went up due to the growth in the prices for fodder for cattle and some cattle producers reducing their production. According to some analysts, meat prices might stay elevated until the end of 2021. Concerning the vegetable prices, thanks to the drought and extremely high temperatures during summer, the yield for many types of vegetables were cut considerably, hereby reducing the supply.

Though the annualized print was elevated since May (3.6% yoy), the print stabilised during June and July at 3.3% as food prices lost dynamics. However, in August, the inflation upswing (+4.3%) represented the highest growth since April/2017 (4%) and was also driven by prices for food and non-alcoholic beverages (+5.2% yoy), in particular meat and vegetable prices.

Though elevated, inflation remains inside the inflation target (3% +/- 1.5pp), at least for now. On the NBS key-rate-setting meeting held last week, the NBS announced its expectation that inflation will move into the upper part of the inflation target until H1 2022 and that it will be ready to take action in the shortest possible time in-between the meetings in case of more pronounced inflationary pressures, by adequately adjusting dinar liquidity conditions and an appropriate targeting of the average repo rate. Thus, we can expect the institution to take action using one or both of these instruments, but we still expect the NBS will be reluctant to hike the key rate given the new wave of Covid and its potential downbeat impact on the economy. Even though no restrictions have been mentioned so far, we can expect a certain scheme of restrictive measures, albeit in a rather limited manner.

A scheme of light restrictive measures, the third fiscal stimulus package already being utilised to a great extent and, most importantly, the slowing core inflation rate (+1.8% yoy) all advocate for a continuation of low interest rates, yet this can only be maintained in a scenario where the heightened inflation does not prolong for an extended period of time.