Inflation in Serbia is showing signs of moderation, but the underlying factors driving this trend are critical to understand. The current decrease in inflation is not a result of increased productivity, investment-led growth, or improved supply conditions. Instead, it stems from weak domestic demand, reduced consumption, and declining investment, which are limiting pricing power across various sectors of the economy. This context will significantly influence price movements, wage trends, and monetary policy decisions leading into 2026.
The baseline inflation forecast for 2026 suggests that if external conditions remain stable and domestic demand continues to be weak to moderate, the headline inflation rate may stabilize within a range of 3.0% to 4.5% annually. While this rate would approach the upper limit of the central bank’s target zone, it lacks the robust economic environment typically associated with sustained price stability.
Core inflation, which excludes volatile food and energy prices, is anticipated to persist in the range of 4.0% to 5.0%. This persistence is attributed to ongoing cost pressures within services, housing costs, and labor-intensive sectors where productivity improvements are limited and wage increases have not fully detached from previous inflation trends.
Food inflation is expected to stabilize further after experiencing significant fluctuations in prior years, trending toward a range of 3% to 5%, assuming average agricultural yields and consistent regional supply chains. In contrast, energy prices remain a key variable; under favorable conditions with steady regional gas and electricity prices, energy-related inflation could range from 0% to 2%. However, any external shocks could quickly impact consumer price indices.
Regarding wage dynamics, nominal wage growth in 2026 is projected to decelerate compared to previous years. A realistic estimate places nominal wage growth between 5% and 7%, primarily driven by public sector adjustments and selective labor shortages rather than widespread private sector growth. When adjusted for inflation, real wage growth may only reach 1% to 2%, with some sectors—particularly retail and labor-intensive manufacturing—potentially facing stagnation or declines in real wages. This limited purchasing power among households contributes to the easing inflationary pressures as they cannot sustain significant price increases.
Price dynamics will vary across different sectors. In consumer goods and retail, price increases are expected to remain modest at around 2% to 4%, influenced by promotional activities and margin constraints faced by food retailers and fast-moving consumer goods distributors. Conversely, service sectors such as housing-related services, education, healthcare, and personal services may see faster price increases of approximately 5% to 7%, reflecting cost structures driven by wages with minimal productivity gains.
In construction and housing markets, price growth is likely to slow significantly to a range of 1% to 3%, hindered by higher financing costs and cautious consumer behavior that limits developers’ pricing flexibility. Energy-intensive industries will see pricing outcomes influenced more by input cost volatility than domestic demand levels; despite weak demand, margins remain vulnerable due to elevated electricity and gas costs.
For the National Bank of Serbia, the disinflation trend driven by weak demand creates some room for policy adjustments but lacks comfort regarding long-term stability. A plausible scenario anticipates gradual easing of the policy interest rate from current levels toward a range of 4.75% to 5.25% by late 2026 if inflation remains contained and exchange rates stabilize. However, any rate cuts are expected to be cautious and conditional; rapid easing could risk reigniting imported inflation or currency instability while prolonged tightness could exacerbate demand slowdowns.
Credit growth is projected to remain subdued in 2026, with corporate lending expanding modestly while household credit recovers slowly. This environment reinforces a low-demand scenario for inflation rather than breaking it.
In alternative scenarios where external demand weakens further or investment falters, inflation could drop toward 2.5% to 3%, potentially leading to stagnant growth and rising unemployment risks—a situation characterized by disinflation through economic underperformance rather than successful stabilization. Conversely, if investment accelerates and wage growth intensifies—especially through public sector spending—headline inflation might increase toward 5%, prompting the central bank to reconsider its easing strategy.
Businesses must recognize that lower inflation does not equate to a healthier economy; price stability achieved through weak demand remains fragile and subject to reversal. Companies should prepare for limited capacity to pass on cost increases, heightened consumer price sensitivity, persistent margin pressures despite easing headline rates, and ongoing disparities between goods and services inflation.
For policymakers in Serbia, the challenge lies in rekindling investment and productivity without triggering renewed inflationary pressures; failing this transition could result in entering 2026 with stable prices but stagnant economic momentum.
