Throughout the SEE region, 2022 was a year of soaring consumer prices not seen in decades. Early in the year it became clear that initial inflation projections in the state budgets, laid down prior to the Russian invasion of Ukraine, would miss the target. However, the fact that the revised expectations, announced as late as June in Bulgaria and September in Slovenia, also were wide off the mark calls into question the ability of governments in the region to maintain macroeconomic stability in the current highly unpredictable environment.

As for the factors leading to the unexpectedly high inflation rates in 2022, all five major economies in the region were in the same boat. When energy and commodity prices skyrocketed, pushed by the limited supply caused by the war in Ukraine and the global geopolitical tensions, coupled with the sharper and longer-than-expected downturn in China, governments intervened mainly by introducing administrative measures aimed to cap or fix prices of energy, fuel and basic commodities and also provide aid to households and businesses and increased social payments. This pushed inflation further upwards, although key policy rate hikes by central banks soothed the curve in the second half of the year, but at a level considerably higher than expected. A common pattern in all observed countries is that inflation was propelled mainly by energy prices in the first half of the year and increasing food prices in the second half.

The governments of Croatia and Serbia were the most optimistic at the beginning of the year, planning the lowest average annual inflation rates for 2022 among the five major SEE economies. Unsurprisingly, they were the two countries with the biggest deviation from the actual price hikes. Although Croatia was the first country to react to the new circumstances and revise its budget and inflation forecast in May, the new estimation of 7.8% still was 2.9 percentage points (pp) below the actual average annual rate. Bulgaria, the country with the highest average annual inflation rate of 13%, also saw its government underestimating inflation both in the original budget and in the one revised in June. Romania and Slovenia, which were the most conservative countries in their initial expectations, finished the year with the narrowest gaps between expected and actual rates. Slovenia’s government revised its forecast in September to 8.9%, almost matching the average annual rate of 9.3%.

Slovenia combined avoiding overly optimistic expectations with timely revisions to achieve the closest-to-reality estimation in the SEE region, which could have positive implications on the perception of the country’s macroeconomic stability by the public and investors. The misjudgment, observed above all in Croatia and Serbia, and to a lesser extent in Bulgaria, threatens to reduce confidence in the actions of the local governments among investors and thus deteriorate these countries’ prospects for economic growth.