CPI rise keeps speeding to above forecast 3.3% y/y in Romania

Romania’s CPI increased by 3.32% y/y in December, accelerating from the 3.23% y/y rise a month before, according to a release of the statistical office published today. Hence, the CPI increase strongly sped up again and expectedly exceeded the 2.70% y/y central bank forecast. The inflation rate remains at the upper side of the NBR’s target interval of 2.5%+/-1ppt for the third consecutive month, confirming the pilling up of inflationary pressures in the economy.

The largest contribution to the CPI increase came again from the non-food sector, where the price hikes for electricity, gas and fuels keep inflationary pressures strong. The contribution to inflation growth from the food sector also rose compared to the previous month, as prices for food increased by more than 4.00% y/y, the strongest growth since mid-2013. The food inflation was partially generated by the low base, which is to persist in the following periods too. In addition, the services sector came with another slight positive contribution to the CPI increase in December, after constant negative contributions reported last year until November.

We remind that the inflation started to increase at the beginning of last year, despite the 1ppt cut of the VAT rate. Moreover, the increases almost constantly accelerated since then, except for August, fuelled by the low base, especially in food, by the still robust domestic demand and by the imported inflation mostly from fuel prices. The unexpected jumps of some administrative prices also added pressures at the beginning of the year, earlier this summer and in the autumn months.

Nevertheless, the monthly inflation kept on softening in December, for the second consecutive month, which might be also the result of demand moderation trend. The price growth moderation in the food sector was largely triggered by some price drops for fruits and sugar. In the non-food sector, prices for fuels kept on rising, but the electricity price flattened m/m. Prices on tobacco products and furniture also added monthly inflationary pressure, similar to the previous month. In the services sector, only tariffs on air transport rose noticeably m/m in December, while the other categories recorded inflation moderation in the last month of 2017.

Overall, the headline inflation continued to accelerate in December, as we expected. The pick-up was already announced by the central bank, which expects a peak of nearly 4.00% in Q1 this year, largely on the back of the low base and over some stronger increases of administrated prices. As recalled, the monetary authority revised notably up the CPI inflation projection to 2.7% for end-2017 from 1.9% projected before, but the quarterly Inflation Report that is to be discussed at the beginning of February might change the inflation outlook. The inflation expectations point to further CPI acceleration at the beginning of this year, so the NBR decided to hike the policy rate this week, earlier than most of the analysts’ expected.

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