Special Focus Report: Strong demand for services, resilient profit margins and climate-related factors increase inflation inertia

Inflation expected to slow to 2.0% in H2:2024

CPI inflation in Greece picked up to 3.3% y-o-y in Q4:2023, and slowed marginally to 3.1% in 4M:2024, following a notable deceleration to 2.4% y-o-y in mid-2023 led by rapidly decreasing energy prices. Agricultural production losses, due to the flood in central Greece, and rising olive oil prices weighed on food inflation, which exceeded the euro area average for this period.

The observed inflation sluggishness is attributed to a different set of factors, compared to those that fueled the inflation surge in H2:2021-H1:2023:

  • The deflationary role of energy prices has weakened in 4M:2024, with oil related fuel prices having a slightly positive contribution of 0.1 pps in April (-0.03 pps in 4M), compared with an average of -0.5 pps in 2023. Based on the latest information provided by energy futures contracts, it is estimated that oil will have a small positive impact for the rest of the year (c. 0.1 pps, on average).
  • Goods inflation, excluding food and energy, slowed markedly to 1.7% y-o-y in April 2024, from 7.0% in 2023, in line with global trends, as Greece is a price taker for a broad range of imported goods.
  • Food inflation (with a significant CPI weight of 22%) has also showed signs of deceleration in recent months (+5.4% y-o-y in April). In fact, food inflation in Greece declined to 2.6% y-o-y in April − being broadly in line with the euro area average − if we exclude the impact of olive oil price increase of 63.7% y-o-y in April. This impact is amplified by its significantly higher weight in the consumer basket (0.9% in Greece vs 0.2% in the euro area).

The decline in goods inflation would have been more pronounced if the profit margins of companies (especially those in the retail market for consumer goods) were more responsive to the easing of inflation pressures in global commodities and some other imported inputs, as well as lower freight costs in 2023. Nonetheless, signs of normalization in profit margins appeared in H2:2023.

Currently, inflation persistence in Greece is mainly attributed to resilient domestic demand − primarily directed to services − which are typically less responsive to international price trends. Moreover, price increases in tourism-related services significantly exceed total CPI inflation, as well as average services inflation, on the back of strong international demand which strengthens the pricing power of firms in these segments.

Services inflation currently accounts for over 3/4ths of core inflation, reaching 3.7% y-o-y in April 2024 from 3.8% in 2023. Food & transport services, as well as accommodation, posted the largest price increases.

Improving labor market conditions and the increase in the minimum wage by 27.0% between 2021 and 2024, in conjunction with rising non-wage income, led to a cumulative increase in the average household nominal disposable income of c.12.0% between 2022-2024.

The CPI increase over the same period is estimated at 16.0% and the effective drag on total household disposable income is offset when the cumulative increase in employment, of 8.0% in 2022-24, is considered.

NBG economic analysis projects that CPI inflation will decelerate to 2.9% y-o-y in Q2:2024 and converge to 2.0% on average in H2:2024, with the main inflation risks relating to geopolitics and climate factors.


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Special Focus Report: Strong demand for services, resilient profit margins and climate-related factors increase inflation inertia