By Mladen Vitas, retired economist and local councillor for the Green-Left Front
The drop in the year-on-year headline inflation rate from 3.5 per cent in May to 2.7 per cent in June is primarily a statistical base effect, not a sign that the economy has genuinely slowed price increases. As such, it can only be described as a blip.
June 2025 drove a sharp monthly price increase of 0.9 per cent – an unusually high baseline. Automatically, this produces a lower annual rate twelve months later (today), regardless of what actually happened to prices in the interim.
Breaking down this figure by component confirms as much. The non-core portion of the index (food, energy, alcohol, tobacco) is driving the decline. Food in June was 4.3 per cent cheaper year-on-year, thanks to a good agricultural season this year and a high base from last year, when we suffered an April frost (making fruit excessively expensive) and a drought (making other market produce relatively costly). This is a classic volatile component of headline inflation. It depends on weather and global commodity prices, not on economic or monetary policy, and it typically reverts quickly to its baseline once the triggering shock subsides.
Analyzed individually, the word “food” in these statistics is misleadingly broad. The minus 4.3 per cent figure is an average across the entire category, including raw agricultural production whose prices depend on season and weather. For the processed food citizens actually buy in restaurants, bakeries, or shops, the picture is reversed. According to the SORS (Statistical Office of the Republic of Serbia), catering services in June were 5.6 per cent more expensive year-on-year – not cheaper, as the average suggests. Ready meals rose by 10.7 per cent, cakes by 8.1 per cent, bread by 7.8 per cent, alcoholic beverages by 6.8 per cent, and non-alcoholic drinks by 6.4 per cent. The average figure for “cheaper food” may be statistically correct, but it bears almost no relation to reality at the till when citizens buy groceries rather than raw farm produce.
The immutable core
The core index (everything excluding food and energy) tells a different story. The latest confirmed figure for core inflation, from May, was 4.5 per cent – right at the upper threshold of the National Bank of Serbia’s (NBS) target band ($3 \pm 1.5\%$ per cent). Crucially, the core rate in May was higher than headline inflation (4.5 per cent vs. 3.5 per cent), which is the exact opposite of what one would expect during a period of genuine price stabilization.
The June core rate has not yet been formally published. The SORS does not calculate it at all; it is exclusively an NBS metric. The NBS last addressed it on 9 July – prior to the release of the June data – in vague terms (“relatively stable, near the upper end of the target band,” according to Governor Tabaković). The precise figure will only be known at the meeting on 13 August.
Why does this difference matter? The core index reflects how much money people actually have and how much employers and service providers can charge. When elevated, it represents inflationary pressure that moves slowly through the economy. The non-core component responds to external shocks that arrive and pass quickly. Core inflation is therefore inherently stickier: it rises more slowly, but falls more slowly too. Its persistent position at the ceiling of the target band while headline inflation drops indicates that any improvement is shallow and relies on a single component, rather than reflecting a broader cooling of the economy.
While non-core inflation drops due to raw food items, services within the core basket are accelerating. Rents are up 11.9 per cent year-on-year, and utilities are rising even faster: water supply is up 20.6 per cent, sewerage 11.5 per cent, waste collection 10.8 per cent, and healthcare services have also surged, with outpatient services rising between 9.6 and 10.7 per cent. These are prices that rarely come back down once increased, tied as they are to wages and regulated tariffs – unlike agricultural goods, whose prices fluctuate far more easily.
An interest rate unmoved by reality
The NBS was not always this rigid, or at least not to the same degree. It began cutting interest rates only after inflation entered the target band in mid-2024, doing so in three steps (June, July, September, by a quarter of a percentage point each time) down to 5.75 per cent, when inflation stood at 4.2 per cent. Since then, rates have not moved once in almost two full years, even as inflation fell from 4.2 to 2.7 per cent. On 9 July, the Executive Board kept the key policy rate unchanged once again, explicitly citing the fact that core inflation remains at the upper bound of the target. While that offers a valid rationale for caution, it leaves unexplained why the same logic was never applied over the past two years, regardless of how the numbers shifted.
An additional, officially stated reason is geopolitical. The NBS highlights the conflict in the Middle East as a primary source of global uncertainty, carrying the risk that escalation could drive up world oil prices and trigger a fresh energy shock. From that perspective, maintaining the policy rate is not merely about defending the exchange rate, but also an insurance policy against risks outside the NBS’s control that could overnight invalidate any argument for monetary easing.
What is actually being defended?
It is difficult to justify freezing the policy rate purely through caution regarding core inflation and energy risks. A more plausible supplementary reason – and one openly acknowledged – is the stability of the dinar exchange rate, a priority mentioned in almost every NBS press release. That priority does have a real economic foundation. Serbia is a deeply euroised economy, with loans, savings, and property prices tied to the euro; exchange rate fluctuations quickly translate into inflation and financial instability, particularly for households with euro-denominated debt. In a country with historical memory of hyperinflation in the 1990s, a stable exchange rate serves a tangible, rather than merely symbolic, nominal anchor.
However, that defence has its limits. When interest rates remain unchanged for nearly two years while inflation drops by a third – and with no serious external pressure threatening the currency – the high policy rate no longer serves exclusively to curb prices. It also serves to maintain foreign exchange reserves and the attractiveness of dinar savings. The cost is borne by the economy and citizens through credit that is more expensive than inflation alone would warrant. Here, economic logic gives way to political logic: for years, a stable exchange rate has served as proof of “stability” for voters, regardless of whether it remains economically necessary on this scale. When the Governor states that monetary policy operates in harmony with the Government’s economic measures, it is a candid admission that exchange rate stability ceased to be a purely technical matter long ago.
Macut bit the bait; Tabaković and Mali did not
This article was strongly prompted by the way Prime Minister Đuro Macut communicated the “significant drop” in year-on-year headline inflation to 2.7 per cent, presenting it as his own success and a victory for the Government, rather than Mother Nature.
Governor Jorgovanka Tabaković mentioned the decrease only three days after the official SORS release – in passing, with realistic commentary, as part of an NBS profit report before a parliamentary committee – and was conditionally fair. The Minister of Finance did not comment either, knowing full well that experts cannot falsely present this supposed drop to the public as a major policy triumph, precisely because genuine inflation reduction is practically non-existent, nor were government policies the cause of the temporary dip. Though he would not have minded spinning it a little – he knows how.
Prime Minister Macut, however, appeared personally delighted – understandably so, given he is not an expert. No, he is not an expert, but he found what he considered an excellent opportunity to prove himself. Six days before the statistical office published the data, he issued a direct political statement claiming, among other things, that inflation at this level was proof that “Government measures are yielding results,” adding that Serbian inflation was below the European Union average.
Neither claim is true. We have already explained that Mother Nature deserves the credit for the first. As for the second, Eurostat publishes the Harmonised Index of Consumer Prices (HICP), according to which average June inflation in the eurozone (21 European nations) was 2.8 per cent, whereas Serbia, using the same methodology, recorded annual inflation of 3 per cent in June – higher than the average. Nor is Serbia’s average lower than that of the wider EU (27 nations), where the June average stood at 2.9 per cent.
Our statistical office officially uses the Consumer Price Index (CPI), colloquially known as the consumer basket index, which indeed stood at 2.7 per cent in June. But when comparing Serbia to the EU, Macut is mixing apples and oranges. If we were fortunate enough to already be in the EU, we would be required to harmonise our statistics too.
Second, and far more importantly, core inflation in the eurozone in June 2026 stood at 2.4 per cent, down from 2.6 per cent in May. Excellent news – and far better than our 4.5 per cent (or, as the Governor puts it, “relatively stable, near the upper end of the target”).
Third, the eurozone average for core inflation is 2.4 per cent compared to 2.8 per cent for headline inflation. Unlike in Serbia, where the situation is reversed, core inflation in Europe is lower than headline inflation – a strong indicator that eurozone inflation is genuinely dropping towards its 2 per cent target for this year. It is abundantly clear that the energy shock remains a factor in Europe due to geopolitics, keeping headline inflation above core inflation. I shudder to think what would happen in Serbia if we paid European prices for gas: recession, inflation springboarded from 4.5 per cent, business closures, and an exodus of foreign investors.
Fourth and finally, the inflation target for Serbia this year is 3 per cent, whereas for the eurozone it is 2 per cent. That is no minor difference. It shows that inflation in the eurozone is approached seriously, backed by economic and monetary policies rich in fine-tuning. In Serbia, the only thing fine-tuned is the corrupt system. Monetary policy does not concern itself overmuch with inflation, but with the exchange rate.
Even so, let me try to defend the Prime Minister, despite the misrepresentations and spin surrounding inflation. He did not come off as the fool in the room. He is neither foolish, nor is he to my taste for company. Next, please!
(Danas, 22.07.2026)
https://www.danas.rs/vesti/ekonomija/inflacija-27-odsto-sta-pada-a-sta-i-dalje-raste/