CPI inflation flattened at 4.1% y/y in May, approximately at the same level as in April, according to figures of the INSSE. Inflation remained above market expectations, which pointed to a 3.9% y/y moderation. The indicator farther away from the NBR’s target interval (2.5%+/-1pp). Besides, the central bank revised upwards its short-term inflation forecast and underlined upside risks to the medium-term inflation outlook increased. However, CPI inflation slowed down its rise in monthly terms, as contracting demand in non-food is easing price growths and the effects of price hikes in the telecom sector are fading.
Inflation has remained above expectations since February and was mainly fuelled by strong acceleration of non-food price growth at the beginning of 2019, mainly triggered by robust increase in fuel and tobacco prices. Some food and service price acceleration added in April, mostly coming from fruits and vegetables and from price hikes in telecom. Food inflation kept on speeding in May, mostly due to weaker domestic supply and faster imported inflation. Also, telecom companies keep on rising prices to cushion the negative effects on their profitability from the new sales tax. Some moderation effect came from non-foods, where a higher base hampered price growth. In addition, demand is cooling off. Thus, non-food prices’ contribution to the overall CPI in May decreased to 1.57pps from 1.75pps in April and we expect further easing in the following periods. Meanwhile, food and services increased their contribution to the CPI in May, both adding 0.18pps. Inflationary pressure from services will very probably persist this year, due to the new sales tax, but we expect inflation to ease in the food segment mainly due to weakening demand.
Monthly inflation slowed, mainly over weaker price growth in non-foods and services. Most telecom companies increased prices in April and there were only a few smaller ones that followed in May, which might explain why prices increased at a softer pace. Monthly inflation of non-foods was the weakest in 2019, mostly because upward pressure from higher fuel, energy and tobacco prices visibly diminished. Inflation moderation in services also pulled down adjusted CORE2 inflation in May, down to 0.38% m/m from 0.42% m/m in April and we expect further slowdown in the following period mainly due to statistical effects. That would weigh in favour of those who estimate another policy rate hold in the NBR’s next MPC meeting in July. Besides, the NBR already hinted that a policy rate hike is not necessarily a good idea and that it would try to continue tightening using other instruments. We also don’t think that a policy rate increase is very probable soon, despite stronger-than-expected inflation, as we doubt that the NBR would make such move unless a regional trend would initiate.
Generally, it seems that stronger-than-expected inflationary pressure persisted in May, mostly on the back of the new sales tax that pushed telecom prices up and because weak domestic supply triggers a pick-up in imported inflation. The easing observed in non-food was mostly on the back of some controversial governmental measures that capped gas and electricity prices for households, but also because fuel prices cooled off and domestic demand is weakening.