PRICE LEVEL CONVERGENCE AND ITS IMPACT ON INFLATION IN CROATIA

The paper explores consequence of the prospective EU accession on the price level in Croatia in the context of the price level convergence process within the European economic area. Result based on cross-country regressions indicates that convergence pressures towards the overall price level rise should be limited. Even in the case of accession to the EU with its current income and price levels, Croatia is assessed to be faced with a moderate 1.4-percentage rise in its price level per year in average for fi rst several years of its membership, as compared to price level in euro-zone countries. Assessment of price changes in major product groups suggests that Croatia should not expect any major jump in prices of consumer goods (food, beverages, clothing, footwear, household items) due to its current proximity to average prices in the EU. Stronger upward pressures could be realized in prices of services (education, recreation, and culture), housing and energy supply. Overall, convergence process will put mild strains on price and exchange rate stability after Croatian accession to the EU and it should not prevent Croatia from fulfi lling the ERM II criteria and opting for early adoption of the euro.