CPI inflation accelerated to 4.03% y/y in March from 3.38% y/y a month before, according to figures of the INSSE. The print was above market expectations, at 3.9% y/y, pushing the indicator farther away from the NBR’s target interval (2.5%+/-1pp). Besides, the central bank already announced it would revise upwards its short-term inflation forecast and underlined upside risks to the medium-term inflation outlook increased.
The higher-than-expected inflation rate in February and March was mostly fuelled by strong accelerations of non-food price growth, mainly triggered by robust increase in fuel and tobacco prices. Since the non-food segment has the biggest weight in the CPI, its contribution to jumped to 1.99pps in March from 1.79pps in February, increasing influence of CPI components outside the monetary policy scope. Electricity price growth flattened despite the newly introduced energy sales tax and we do not expect major price hikes in due to a high base and because the government reintroduced regulated prices for households. Nevertheless, non-food inflation might remain strong, on the back of higher excise tax on tobacco products, possible fuel price hikes and due to the indirect effects of the new energy sales tax that might be transmitted to final prices of other non-food products. At the same time, food inflation remained almost the same as in February and service prices sped up increase with a milder pace. Thus, food had the same 1.42pp contribution to the CPI in March, while services increased theirs slightly to 0.64pps. Looking ahead, we expect inflationary pressure to keep moderately piling up in services, as some telecommunication companies have already announced they were hiking tariffs after a new sales tax was enforced in that sector, too.
Monthly inflation kept on moderating and was mainly fuelled by non-food, where tobacco and fuels reported other relatively stronger price hikes in March. Almost all non-foods recorded monthly price growth in March. Meanwhile, foods softened monthly inflation significantly in March and their influence in monthly inflation reduced substantially compared to January and February. Besides, the NBR estimated that the contribution of components outside the monetary policy scope would diminish substantially by the end of this year.
Over all, it seems that inflationary pressure is piling up in the economy at the beginning of 2019, mostly on the back of surging import and an unexpected persistence of consumption robust growth. Fuel price developments has a major contribution to which the government added its still relaxed income policy. The central bank expected inflation to moderate in Q1-Q3’19, followed by some pick-up in Q4, yet remaining inside the targeted interval. The surprising pick-up in Q1 places the central bank in a difficult situation, as the need of monetary tightening increases amid economic growth slowdown, weakening investment and widening CA deficit. The NBR chose to adopt a strict liquidity control for now and we do not see a policy rate hike as very probable soon, unless tightening gets more serious in the region.