We find that in the recent past, marked by the pandemic and the war in Ukraine, external supply-side disruptions have been the main driver of food price inflation in Croatia and the rest of the euro area. What sets Croatia apart from the remainder of the euro area are the speed and the ease with which retailers passed these costs on to consumers. And last but not least, we touch upon the energy shock caused by the escalation of the conflict in the Middle East, which threatens to set off a new inflationary wave.
Croatia imports a significant share of its food, and the value chain, from production to retail, is energy intensive, making domestic food prices susceptible to increasingly frequent disruptions in international energy and food commodity markets. To assess the importance of these disturbances on domestic food price inflation, by drawing on new detailed data on import prices and quantities for 50 food categories, we have broken down food inflation into external factors and domestic factors, independent of imports and commodity movements. We find that in the recent past, marked by the pandemic and the war in Ukraine, external supply-side disruptions have been the main driver of food price inflation in Croatia and the rest of the euro area. However, what sets Croatia apart from the remainder of the euro area are the speed and the ease with which retailers passed these costs on to consumers. Against the backdrop of exceptionally strong domestic demand – driven by real wage growth, strong tourism growth, as well as positive consumer sentiment – retailers, even without increasing their margins, doubled their profits compared to the pre-pandemic period. These findings are important in the context of the current energy disruption caused by the conflict in the Middle East, but also for future similar disruptions in external markets. In the situation where external shocks create upward pressure on inflation, while domestic demand is surging – due, for instance, to accelerated growth in disposable income, intensified consumer sentiment or delayed reaction of stabilisation policies – the impact on domestic prices may be amplified, both for food and other components of the consumer basket.
Food and beverages account for almost a third of the consumer basket in Croatia, which is why the change in their prices has a strong impact on citizens’ standard of living and well-being. In addition, food is purchased on a daily basis, meaning that, as in the case of energy prices, consumers’ perceptions of overall inflation are often formed based on trends in food prices – the effect is often disproportional, given food's actual weight in the overall consumption basket (https://www.hnb.hr/-/inflacija-i-percepcija-inflacije-u-hrvatskoj).
Consumer food prices are also affected by disruptions in international energy and food commodity markets, such as the disruptions in 2021 and 2022 caused by the pandemic and the war in Ukraine, but also by local segments of the price chain, ranging from agriculture and manufacturing to wholesale and retail trade. Each of these segments is subject to specific supply-side and demand-side conditions and seeks to maximise profits to the extent that market conditions allow, as corporations do in other sectors of the economy as well. Amid the global rise in energy and food commodity prices, food prices in Croatia in 2022 grew relatively in line with the euro area average. However, their recent increase in 2024 and 2025 was predominantly of a local nature given that food prices at the euro area level rose only marginally (Figure 1).
Figure 1 Food price inflation (Croatia and the euro area) and energy price index
Note: Energy price index is calculated as an average of crude oil prices (Brent Oil, EUR) and Dutch gas spot prices (TTF, EUR), with 2019 as base 100.
Sources: Eurostat and CNB calculations.
The impact of increasingly frequent and intense disruptions in international markets on domestic food prices can be disentangled from the effects of local factors, relating to domestic supply chains, corporate business practices, and consumer behaviour. Food is not a homogeneous product category, meaning that the relative importance of foreign factors relative to domestic factors varies significantly across food components. Thus, the increase in retail prices of some items, such as chocolate, coffee and edible oil, largely reflects a strong rise in the prices of commodities used in production, that is, cocoa, raw coffee and sunflower seeds on global markets, since these products are fully imported or their domestic production relies on imported commodities. In contrast, products such as wine, poultry meat or tangerines are less dependent on imports given that total consumption is largely accounted for by domestic production.
Sources of inflationary pressures can be broken down by their geographical location (external or domestic) and type (supply or demand shocks) based on detailed indicators on volumes and prices of imports of individual groups of food products. This breakdown provides greater insight into specific parts of the value chain where inflation first emerges – whether it arises in the domestic segments of the value chain or is imported from foreign markets. The rise in import prices and the concurrent decline in the volume of imports suggest that there are disturbances on the supply side in the international market, caused by factors such as adverse weather conditions, animal diseases or supply chain disruptions. The rise in energy prices in the international market is also manifested as a supply-side shock, given that higher energy costs drive up food prices at all stages of the production chain, without increasing the volume of imports: in production (fertilisers, machinery, greenhouse heating), as well as in processing, transport and retail trade. Inflation can also be driven by local factors that do not depend on international markets. When both prices and volumes of imports are rising at the same time, inflation is likely to be driven by demand for products, brought about by rising income or high tourist expenditure, for example. Such shocks manifest as rising food retail prices in Croatia that deviate from comparable trends in foreign markets. Local shocks also encompass factors such as rising producer prices by domestic farmers and processors, local production disruptions or autonomous changes in profit margins and retailers’ pricing policies. By assessing the relative importance of the drivers of inflation – whether they are external or domestic and whether they stem from the supply side or demand side – insight can be gained into the market forces behind price developments. In this context, it is important to distinguish between local disturbances and common external shocks that simultaneously affect both Croatia and the euro area as a whole. Common monetary policy addresses common demand-side shocks in euro area countries, while local shocks are more adequately addressed by fiscal policy and other policies (e.g. agricultural, environmental or spatial planning policies). Regarding the causes of disruptions, monetary policy is more appropriate for addressing common demand-side shocks given that interest rate adjustments influence inflation precisely by cushioning aggregate demand. Supply-driven shocks, by contrast, are often short-lived and typically do not elicit an immediate monetary policy response, unless they begin to affect overall inflation through rising inflationary expectations. Although food prices often change under the influence of supply-side factors, they can play an important role in shaping inflationary expectations – precisely because of their frequency of purchase and “visibility”. If short-term food price shocks begin to feed into citizens’ expectations of future inflation and spread to the remaining components of the consumer basket, this might trigger more long-lasting upward pressure on both prices and wages. Moreover, demand-driven increases in euro area food prices point to broader economic conditions, which monetary policy is well equipped to address. Therefore, an in-depth analysis of these trends is necessary in order to identify, in a timely manner, whether temporary disruptions are translating into more persistent inflationary trends.
Figure 2 Decomposition of consumer price inflation and import price inflation
Notes: Consumer price inflation series are sourced from Eurostat, while import price inflation series are constructed from Intrastat and customs declaration data, with value and volume data for food and beverages mapped to COICOP 4-digit categories in proportion to imported quantities. Unit import prices and their annual changes, as well as annual inflation rates are calculated by COICOP category. For each category, a BVAR model with three variables (import price, import quantity, and domestic retail price) was estimated, with structural shocks identified through a combination of zero and sign restrictions. Within the model, shocks are identified such that co-movement of import prices and quantities in the same direction indicates a demand shock, while movement in opposite directions indicates a supply shock; movements in domestic retail prices independent of imports are attributed to a local shock.
Sources: Comext, Eurostat and CNB calculations.
Negative Croatian specificities
External supply-side disruptions were an important driver of food price inflation, especially in 2022 and 2023, but were further amplified by local factors, with retailers often able to pass on rising costs to consumers more quickly and intensely than in other countries The rise in food prices has been relatively concentrated, with a dozen product categories alone, out of a total of 76, accounting for more than a half of the total rise in food prices over the past few years. The decomposition of inflation for selected products that dominated food price inflation over the observed period (chocolate, beef and wine) suggests that this episode of pronounced price growth differs markedly from previous episodes (Figure 2a). The energy and food crisis after the outbreak of the war in Ukraine, further exacerbated by the post-pandemic increase in demand, brought about the first wave of a global increase in inflation, with domestic prices of beef, chocolate and other products increasing at a pace similar to that in the region. Regarding the second wave of inflation, which started in 2024, our results suggest that retailers were able to quickly and successfully pass on the cost increases driven by external supply-side shocks – such as a decrease in the quantity and an increase in the prices of cocoa and beef – to final consumers (Figure 2a). Due to poor cocoa yields in West Africa, chocolate prices rose sharply in 2024 and 2025 in all countries, as they rely on the same underlying commodity source. In Croatia, however, consumer prices began rising as soon as commodity prices increased, whereas in all other countries they rose more slowly and with a time lag (Figure 2b). Similarly, the price of beef increased in all countries during this period due to stricter environmental standards and higher operational costs, which drove up production costs and contributed to the gradual reduction of livestock stocks. The supply of beef in general, apart from these cyclical factors, is catching up with changes in demand more slowly than, for example, that of poultry or pork, due to considerably lower reproduction rates and a longer production cycle. Unlike in the rest of the euro area, rising domestic producer prices and a robust demand for beef further intensified the already present external inflationary pressures in Croatia in the later part of the period and final prices mostly rose more strongly than in other countries. The third key category is wine: the results suggest that, unlike the previous categories, developments in the international market have had almost no impact on wine prices – retail prices have grown despite favourable external downward price pressures. This insensitivity to external trends is mainly attributable to a strong preference for domestic wine, as well as robust aggregate demand. Over the observed period, the increase in wine prices was among the highest in Europe and, on average, largely higher than that of other food components in Croatia. This shows that the insensitivity of a product’s price to global market trends, whether due to self-sufficiency of production or a preference for domestic goods, is not a guarantee of lower inflation for that product. The three analysed examples represent components of the food and beverages category, whose prices rose due to different initial causes, but whose overall increases were ultimately driven by strong domestic demand.
Results obtained by aggregating the decomposed drivers of price changes across 50 categories of food products confirm that the largest share of inflationary pressures in the recent period can be attributed to international market dynamics, primarily driven by supply-side shocks (Figure 4). However, the analysis of individual products illustrates that supply side shocks are only one part of the equation: the ability to pass inflationary pressure on to final prices also largely depends on the robustness of domestic demand, especially when it exceeds the existing supply (either supply of imports or domestic supply determined by the structural features of a product). Thus, euro area food price inflation stabilised at a low level in 2024, while in Croatia, subject to the same external disruptions, it flared up again in 2024 and 2025, driven by domestic factors. Economic activity and real wage growth in this period were stronger in Croatia than in the rest of the euro area (Figure 3). Together, these factors strengthened domestic demand, that is, the domestic business cycle, against the backdrop of a visible slowdown in economic activity at the euro area level, which ultimately led to a pronounced domestic inflation component.
Figure 3 GDP and real wage growth in Croatia and other member countries
Sources: Eurostat and CNB calculations.
The dynamics of the domestic component of food price inflation illustrate well the crucial role of demand in the formation of final prices. The decomposition suggests that the domestic component of inflation (“local shock”), accompanied by unfavourable external trends, had a crucial impact on the reignition of food price inflation in mid-2024. However, in early 2025, this domestic inflation component, independent of imports, recorded a sharp decline that coincided with the consumer boycott of retail stores organised by a platform called Halo, inspektore. The boycott appears to have temporarily reduced food price inflation by 2 percentage points over the following three months (Figure 4, right, blue line). However, this effect was largely masked by a simultaneous increase in import prices, which exerted upward pressure on the overall food price level, offsetting the effect of the organised consumer campaign.
Figure 4 Decomposition of the annual food and beverage inflation rate into import supply and demand shocks and a residual “local” shock, illustrating the effect of the consumer boycott
Note: The right-hand figure shows contributions of individual shocks to the food and beverage inflation rate in the recent period.
Sources: Comext, Eurostat and CNB calculations.
The role of retail chains and other factors in food price inflation
In the period from 2019 to 2024, food retailers doubled their profits while maintaining a stable gross margin (Figure 5), suggesting that they successfully passed on rising costs to final consumers. It should be noted that the maintenance of margins amid increased costs in the recent inflationary episode was not limited to the retail sector or large retail chains, but was rather a rule at the level of the entire economy: the overall profits of all enterprises doubled while they also maintained stable gross margins that were higher at the economy level than those in the trade sector. Such an increase in profits, higher than the cumulative food price inflation of approximately 40% in the same period, was possible only under conditions of robust domestic demand (Figure 3 and Figure 5c). In such circumstances, corporates pass on costs to consumers, as they are willing to accept a new price. This is how inflation perceived by consumers in stores manifests itself, even though it is largely triggered by external disruptions at earlier stages of the value chain. It can be abated by an easing of demand, either autonomously due to consumer behaviour or by economic policy actions, as well as by economic policy measures aimed at strengthening competition. Observing food price inflation only through the prism of corporate pricing strategy does not provide a complete picture, given that without strong demand that supports such decisions, the pass-through of costs to consumers would not be possible.
Figure 5 Profits and profit margins in domestic food production and trade
Notes: The category “All enterprises” refers to a sample of 1000 largest Croatian enterprises in 2024. The sector “Retail trade” covers business entities classified in class G47 according to the National Classification of Economic Activities (NCEA), while the category “Large retail chains” refers only to the seven largest retail chains in the domestic market. Gross margin is calculated as the difference between revenues and cost of goods sold, expressed as a share of revenues. EBIT stands for operating income, excluding financing costs and taxes.
Sources: FINA and CBS.
The energy shock caused by the escalation of conflict in the Middle East is creating new upward price pressures, potentially hinting at a new inflationary wave. Experience from the previous episode suggests that, while supply-side shocks are difficult to avoid in the short run – an increase in self-sufficiency in energy and food production (which alone does not guarantee lower inflation) can be a strategic objective only in the longer term – it is important to recognise the risk of adding unnecessary fuel to adverse external developments through excessive demand. However, these domestic inflation drivers are likely to be less pronounced this time: fiscal space is now significantly constrained, and consumers have already shown awareness that, irrespective of their disposable income levels, their consumption patterns are an important determinant of inflation. Should demand nevertheless intensify – for instance due to increased consumer sentiment and further increase in disposable income – food price inflation is likely to accelerate in the event of a longer-than-expected conflict in the Middle East.