The World Bank has conducted an analysis that suggests the recent strengthening of the exchange rate in Albania has played a role in reducing inflation. However, a closer look at the comprehensive data reveals that profit growth has been a significant contributor to inflation in some Western Balkan countries, while in others, it has been driven by increases in wages.
Profit growth, in this context, is calculated as the difference between gross value added and labor costs. The World Bank’s findings indicate that in 2021, profit growth was the primary driver of domestic inflation in countries like Albania, Bosnia and Herzegovina, and Montenegro. In 2022, profit growth continued to exert considerable influence in North Macedonia, whereas wage growth emerged as a driver of inflation in Serbia and Montenegro starting from early 2022, and in North Macedonia and Bosnia and Herzegovina from the latter part of 2022.
In the case of Albania, profit levels began to rise in mid-2021, contributing an average of 2.6 percentage points to the inflation rate that year. In 2022, profits had an extraordinary impact, pushing inflation up by 7.7%. This was largely because a significant portion of self-employed individuals, earning mixed incomes that are categorized as profits, had a considerable impact on inflation.
Conversely, the relatively lower contribution of wages (partially due to the informal labor sector) has limited the impact of wage increases on inflation in Albania.
In Bosnia and Herzegovina, profits also emerged as the primary driver of inflation in 2021 and remained a strong factor throughout 2022, contributing approximately 5.3 percentage points to the inflation rate.
Wage increases, gradually introduced, began to have a more substantial impact on inflation from 2022 and became the primary driver in the second quarter of that year.
In North Macedonia, the role of profits in driving inflation remained relatively low in 2021, with an average contribution of about 0.7 percentage points. However, by 2022, profits started to exert a more substantial influence, contributing 5.7 percentage points to inflation. Wages began to surpass profits as the leading contributor to inflation in the latter half of 2022.
In Montenegro, profit growth was a significant factor that pushed inflation upward, contributing an average of 3.7 percentage points in 2021. However, in 2022, this trend was disrupted by an increase in employment and the minimum wage, which led to higher labor costs. Consequently, wages have now become the primary contributor to inflation in Montenegro.
Lastly, net taxes have also had an impact on inflation, causing an increase in 2022, except for North Macedonia. In this case, net taxes reduced inflation by 5 percentage points in 2022, primarily due to a substantial increase in subsidies for exported products. This situation changed in 2023 when the North Macedonian Government reduced subsidies for the economy.
In other countries, net taxes had a relatively minor impact. The World Bank’s analysis suggests that inflationary pressures are gradually subsiding throughout the Western Balkans, although caution is still required.
