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Jurij Bajec Ph.D., Special Advisor At The Institute Of Economics And Full Professor Of The University Of Belgrade Faculty Of Economics

Measures To Curb Inflation Are Mistaken

Short-term measures aimed at protecting standards, such as freezing the prices of key food items, interventions from commodity reserves or reductions in vat on some key products and services, are short-lived and create additional market disruptions, jeopardising budget stability

Inflation hasn’t been a relevant topic in the United States, the European Union and other developed countries for many years. Central banks tried in vain to use an expansive monetary policy achieve a desired price growth of around 2%. Everything changed at the end of 2021, when the growth of prices reached 7% in the U.S. and 5% in the EU. It turned out that thep andemic wasn’t over, that international supply chains were still broken, that major increases in the prices of raw materials and food had occurred, and that the dramatic leap in energy prices had imposed additional pressure on production input prices and living costs.

A gradual fall in prices is projected to come in 2022 and 2023, to the extent that these external or “imported” inflation factors will be overcome, and monetary and fiscal policy will restore its stabilising functions. However, we should warn that excessively fast monetary restrictions could jeopardise economic growth and employment levels. Apart from this, many years of economic restructuring lie ahead at both the national and global levels, in accordance with the “green agenda” and digitalisation. And that restructuring requires time and huge financial resources. As such, it is more likely to expect inflation to gradually decrease over the coming period, but we should wait to reach the desired “2% annual growth”.

We could note that the inflation that came as a minor consequence of internal disturbances and macroeconomic policy errors was actually caused by external factors, primarily unexpected economic or political ones.

The main cause of inflation back in the 1970s was the sudden quadrupling of the price of oil on the world market, followed by a major leap in prices of raw materials and food. Time was required to implement global adjustments to handle the new circumstances and stabilise prices at a new level. Another example is the hyperinflation seen in Germany after World War I, which came as a consequence of the country’s high reparations. In the absence of real sources of financing, the Germans resorted to the accelerated printing of money, which quickly led to a dramatic leap in prices. The hyperinflation experienced in the then FR Yugoslavia at the beginning of the 1990s is also well known – when harsh international sanctions led to major declines in economic activity and market shortages, with attempts to overcome the problem by printing money of ever-less value proving unsuccessful.

In order to achieve lasting price stability, the level of public debt and the current account deficit need to be simultaneously kept under control

Following several years of stable prices, Serbia ended 2021 with inflation of almost 8%, mainly due to the aforementioned external factors that couldn’t be influenced significantly through monetary policy. However, Serbia is also vulnerable to inflation due to “internal” problems, which – again – monetary policy can only influence to a limited extent, primarily through interest rate and exchange rate policies. In order to achieve lasting price stability, the level of public debt and the current account deficit need to be simultaneously kept under control.

Short-term measures aimed at protecting standards, such as freezing the prices of key food items, interventions from commodity reserves or reductions in VAT on some key products and services, are short-lived and create additional market disruptions, jeopardising budget stability. The main precondition for increasing living standards on a realistic basis, alongside macroeconomic stability, is dynamic economic growth, and that means: the continued inflow of foreign direct investments in more technology-intensive sectors; much greater support for domestic investment; opportunities to gain employment in well-paid jobs; the systemic reducing of corruption and a level playing field for all market participants. In short, a comprehensive reform and development policy.

Unfortunately, many Serbian citizens don’t own any property, have no savings and live on low salaries and pensions. Ensuring the price stability of food, communal services, electricity and heating is vital for them, as is the provision of additional subsidies for these purposes intended for socially deprived sections of the population.

For those with higher incomes, it is always good not to “keep all your eggs in one basket”, and not to have excessive belief in the possibility of making quick gains on the financial markets. Longer-term investments in proven mutual funds or gold provides greater security. Given the huge interest in investing in real estate at present, the best option is a loan with the longest possible repayment period and fixed interests rate that can’t be lower than they currently are in the future, but only higher.

Comment by Zoran Panović

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