CPI inflation eased from 5.03% y/y in September to 4.25% y/y in October, according to figures of the INSSE. The result was slightly higher than anticipated, as the consensus projected inflation to ease even further, at 4.1% y/y. The primary reason seems to be an expiring base effect from administered prices, as non-food prices showed the biggest contribution to slower headline inflation, easing from 6.6% y/y in September to 5.3% y/y in October. There is also some relation to oil prices, which starting rising faster last autumn, so there is some impact on fuel and transport service prices as well. Food prices continued to decelerate their growth, easing to a 3-month high at 3.7% y/y. While some hikes were observed during the summer, we would argue that the EU’s common market is now making up for it, with similar effects seen in other EU members with not a stellar summer harvest.
We remind that there is still a lingering base effect from administered prices, which were increased heavily towards the end of 2017 but the government has no intention repeating that in 2018, which will eventually push down headline inflation. Monthly data still show a lot of volatility in headline inflation, with effects from seasonal foods, fuels and administered prices still representing almost half of monthly price growth. For instance, prices excl. seasonal foods, fuels and administered prices rose by only 0.32% m/m in October, compared to the headline 0.52% m/m increase.
Therefore, it appears that the NBR’s end-year inflation forecast, at 3.5% y/y, will most probably prove to be accurate. This still puts inflation at the upper end of the targeted inflation band (2.5%±1pp), but the odds are that headline inflation will continue to gradually converge to the target. Couple with a slowing economy, the NBR expects that no further monetary tightening will be necessary. We remind that the NBR has stepped up repo market operations in order to provide additional liquidity in the money market, which we believe will continue. At this stage, lack of clarity about fiscal policy and a slower growth in main trade partners doesn’t suggest a lot of inflationary pressure to warrant a policy rate hike. A rate cut is also unlikely, since inflation is still above the upper end of the targeted band, but if deceleration continues at a rapid pace, we wouldn’t be surprised if a rate cut follows late in 2019, depending on economic developments, naturally.