Romania’s consumer price index decreased by 0.54% y/y in December, softening from the 0.67% decline the month before, according to a release of the statistical office published today. The CPI fall in December was steeper than the central bank estimation of 0.40% y/y from the most recent Inflation Report published in November last year. The weaker-than-expected deceleration of the CPI decrease was most probably the result of a consumption slowdown above estimations, in our view.
Prices declined with a softer pace in December compared to a month earlier, mainly over a milder price decrease in the non-food segment, which had a smaller negative contribution of 0.38pps to the overall index in the period. The negative contribution of the segment in November was 0.56pps. Food prices insignificantly accelerated the moderate annual rise in December, so the food segment kept its contribution at 0.24pps in the month. Service prices accelerated annual decrease in December to the strongest recorded in the entire last year. In monthly terms, the prices continued on a moderate upward trend, with accelerations in all segments.
As for the entire year, the headline inflation reported a 1.55% price fall compared to 2015, mainly pulled down by a 2.57% decline of food prices. The VAT rate cut on food implemented in June 2015 had a major effect. Prices fell y/y for non-food products and services too in 2016 in annual terms. The 1.04% price decrease in non-food was also fuelled by the decline of the energy prices, mostly oil, on international markets. In addition, the standard VAT rate was slashed to 20% from 24% at the beginning of last year, adding some mild downward pressure on prices. The standard VAT was cut again, but by only 1pp as of the beginning of this year, which should temper down somewhat the prices upward tendency induced by the low base effects this year.
Nevertheless, the consumer prices are expected to switch to increases at the beginning of this year, even if with a milder pace than previously anticipated, as central bank recently announced. In fact, the NBR initially expected the CPI to start growing in December last year, but readjusted its forecast due to steeper-than-expected imported deflation, the reschedule of the administrated energy price increases and due to a stronger negative impact of the standard VAT rate cut to 20% from 24% implemented at the beginning of this year. The monetary authority would most probably revise down again its inflation pick-up expectations, this time over a weaker-than-expected consumption advance, despite the expansionary governmental policies implemented in the past years and planned for this year. Hence, the CPI would likely remain in the lower band of the NBR’s target interval of 2.5%+/-1pp throughout the entire year, in our view.