In Romania CPI fall slightly speeds to 0.8% y/y in July, on non-food price decrease mainly

Romania’s consumer price index decreased by 0.78% y/y in July, slightly steepening from 0.70% a month earlier, according to a release of the stats office published today. The fall was also steeper than 0.70% y/y expected in a poll of analysts questioned by Reuters. The steeper decrease was mainly triggered by a significantly sharper price drop in the non-food segment compared to June. Still, fuel prices also decreased stronger and came with 0.18pps negative contribution to the headline index. Only food had positive contribution to the CPI in July, as prices in the sector increased with the strongest pace since August 2013. Therefore, the headline inflation remained in the negative territory in July, which is in line with the NBR’s recent revisions regarding the CPI outlook. We remind that the NBR initially expected the CPI to return to positive dynamics in June, when the effects of the VAT rate cut on food were to fade. However, the monetary authority changed its projections and said that the inflation might remain negative in annual terms throughout the entire year, due to the steeper-than-expected imported deflation and over changes in scheduled regulated price hikes in the energy sector. Overall, the CPI fell by 1.90% y/y on average in the past 12-month period (Aug 2015-Jul 2016), slightly milder than 2.00% y/y in the previous period ending in June, while the HCPI fell by 1.60% in July, also softer than 1.70% in the previous month.

The CPI decreased in monthly terms too in July, with a stronger pace than in the previous month. Food prices returned to growth m/m mainly pushed up by rising prices for fruits. In the non-food sector, the most significant price decrease was in the energy segment, but prices also edged down m/m in the furniture and chemical products segments. Services prices fell m/m after three consecutive months on the rise, triggered by lower prices for air transport and phone services.

Therefore, the CPI remained on the negative trend since the food VAT rate was cut to 9% from 24% in June last year. The standard VAT rate was also slashed by 4pps to 20% as of January, which added to the effects of the food VAT cut. The falling energy prices, imported deflation and growing external uncertainties on economic growth recovery piled up more downward pressure on prices, so the NBR expects the inflation to remain negative throughout the entire year and revised down its inflation forecast for the end of this year to negative 0.4% from positive 0.6% in the authority’s most recent Inflation Report published earlier this month. However, the central bank keeps warning that the wage hikes, growing consumption and the output gap keep hidden inflationary pressures and sees the CPI turning positive, but in the lower band of the target interval (2.5%+/-1pp) next year.

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