SK: Annual Inflation in Line with Our Expectations in 2024
In December, inflation slowed from 3.2% y/y in November to 2.9% y/y. On a monthly basis, prices declined by 0.4%. In line with our expectation, the average annual inflation rate for the entire year 2024 reached 2.8%, marking a significant slowdown in price growth compared to 2023, when prices rose by an average of 10.5%. Core inflation in 2024 amounted to 2.6%.
In December, annual inflation was mainly driven by rising prices of goods and services. In the category of restaurants and hotels, prices rose by 5.9% y/y (contribution: 0.4%). Long-term higher prices in the food and non-alcoholic beverages category had the most significant influence on inflation development in December 2024, when prices rose by 2.4% y/y (contribution: 0.6%). On the other hand, the growth rate in the categories of food and non-alcoholic beverages slowed down in the last month of 2024 compared to the previous three months. The monthly price drop was largely influenced by lower food prices (-2.4%; contribution: -0.45%). On the other hand, prices rose month-on-month in the transportation division by 0.2% due to more expensive fuels, which increased by 0.7%. Prices also rose by 1.3% m/m (contribution: 0.1%) in the recreation and culture category.
On an annual basis in 2024, the overall inflation rate was mainly affected by the strong regulation of household energy prices, which the government fully capped. The key driver of inflation was food prices, whose growth stagnated just during the second quarter of 2024. In 2024, the growth of consumer prices was mainly influenced by food, but their price increase did not exceed 3%, while in 2023 it was above 17%. Core inflationary pressures persisted in the economy, stemming from a tight labor market. Real wages and household consumption returned to positive territory, and households began rebuilding their savings, which they had been forced to spend in previous years. This behavior naturally dampened further inflationary pressures.
In 2025, inflation will be driven mainly by the effects of consolidation measures, such as a higher VAT and increased business costs due to higher taxation or the introduction of a financial transaction tax. These higher costs will be passed on to consumers. The labor market will remain resilient, and core inflationary pressures will persist. We expect that, unlike most eurozone countries, inflation in Slovakia will remain higher compared to 2024, while the ECB will continue to lower its interest rates. In 2025, we anticipate inflation will exceed 4%. However, due to the continued government policy of capping household energy prices, risks are tilted to the downside.