Inflation in Serbia is currently on a downward trajectory, but the underlying factors driving this trend warrant close examination. The easing of inflation is not the result of increased productivity or robust investment; rather, it stems from diminished domestic demand, reduced consumer spending, and a slowdown in investment activity. These conditions are limiting pricing power across various sectors of the economy and will influence price dynamics, wage growth, and monetary policy up to 2026.
The baseline inflation forecast for 2026 suggests that, barring any significant external shocks and assuming continued moderate domestic demand, headline inflation may stabilize within a range of 3.0% to 4.5% annually. This projection aligns with the upper limit of the central bank’s target zone but lacks the macroeconomic environment typically associated with sustained price stability.
Core inflation, which excludes volatile food and energy prices, is anticipated to remain more persistent, likely fluctuating between 4.0% and 5.0%. This persistence can be attributed to ongoing cost pressures in labor-intensive sectors such as services and rents, where productivity gains are limited and wages have not fully decoupled from previous inflation trends.
Food inflation is expected to normalize following prior volatility, trending toward a range of 3% to 5%, contingent on average agricultural yields and stable supply chains in the region. Conversely, energy inflation remains a critical variable; under favorable conditions with steady regional gas and electricity prices, energy-related inflation could range from 0% to 2%. However, any external price shocks would likely have a rapid impact on the consumer price index.
Regarding wage dynamics, nominal wage growth in 2026 is projected to decelerate significantly compared to previous years. A reasonable estimate places nominal wage growth at between 5% and 7%, primarily driven by public sector adjustments and specific labor shortages rather than widespread private sector expansion. When adjusted for inflation, real wage growth could only reach 1% to 2%, with certain sectors experiencing stagnant or declining real wages. This weak income scenario contributes to the easing of inflation as households lack sufficient purchasing power to support significant price increases.
The implications for businesses are critical: pricing power is expected to remain limited due to increased demand elasticity. Businesses attempting to pass on higher costs may face immediate losses in sales volume.
Price dynamics across sectors are expected to vary considerably in 2026. In the consumer goods and retail sectors, price increases will likely be modest, ranging from 2% to 4%, as promotional pressures and margin compression persist. In contrast, service sectors—including housing-related services, education, healthcare, and personal services—are projected to see faster price increases of around 5% to 7%, driven by wage-related cost structures.
In construction and housing markets, price growth is anticipated to slow significantly to between 1% and 3%, as rising financing costs and cautious consumer behavior limit developers’ pricing flexibility. For energy-intensive industries, pricing outcomes will be influenced more by input cost volatility than by domestic demand; even with sluggish demand, margins remain vulnerable due to elevated electricity and gas costs.
For the National Bank of Serbia, the disinflation driven by weak demand creates some policy flexibility but does not provide comfort. A plausible path forward sees the policy rate gradually decreasing from current levels toward a range of 4.75% to 5.25% by late 2026 if inflation remains contained and the exchange rate stable. However, any rate cuts are expected to be cautious; easing too quickly could reignite imported inflation or currency pressures while maintaining high rates for too long could exacerbate demand slowdown.
Credit growth in 2026 is also expected to remain subdued, with corporate lending growing only modestly while household credit recovers slowly. This trend reinforces an environment of low-demand inflation rather than breaking it.
In alternative scenarios, should external demand weaken further or investment stagnate, inflation could decline more rapidly toward a range of 2.5% to 3.0%, potentially resulting in stagnant growth and heightened unemployment risks. Conversely, if investment picks up pace and wage growth accelerates—especially through public sector spending—headline inflation could rise back toward 5%, compelling the central bank to halt or reverse its easing measures.
For businesses planning their pricing strategies for 2026, it is essential to recognize that lower inflation does not equate to a healthier economy. Price stability achieved through weak demand is precarious and could easily reverse. Companies should anticipate limited capacity for passing on cost increases, heightened consumer price sensitivity, ongoing margin pressures despite easing headline inflation, and persistent disparities between goods and services inflation.
Policymakers face significant challenges ahead: revitalizing investment and productivity without triggering renewed inflationary pressures is crucial for avoiding stagnation as Serbia approaches 2026 with stable prices yet sluggish economic momentum.
