CPI inflation accelerated to 4.12% y/y in July from 3.84% y/y in June, according to figures of the INSSE. Still, consumer inflation picked up milder than market expectations, which pointed to a 4.2% y/y acceleration, mainly over the tobacco excise increase. Indeed, non-food inflation accelerated the strongest in July, chiefly on the back of a distinct rise in tobacco prices. Yet, the acceleration was partly offset by price drops in gas and some locally-produced vegetables in the month.
Even so, the highest inflation rate remains in food, mainly driven by the robust imports of pork and fruits recorded earlier this year. In spite of some cheaper vegetables, food inflation represented 1.64pps in the overall CPI in July, which is more than 1.59pps in June, as meat prices remained on the rise. Non-foods increased their contribution to headline inflation the most, by 0.26pps m/m to 1.65pps, even if natural gas prices decreased. At the same time, service prices kept on moderating with a faster rate in July, as the effects of a new telecom sales tax fade. Besides, some telecom companies even cut back prices after the government softened its fiscal regime and conditions for the 5G licence sale.
The CPI decreased in monthly terms in July, for the second consecutive month, mainly on the back of food, specifically vegetables. Better local production managed to soften inflationary pressure from the food segment, even if fruit prices continued to rise robustly, over more expensive meat imports. Non-food prices also continued to deflate m/m in July, mainly due to gas price drop after the government capped gas and electricity prices for population and very probably because domestic demand is weakening. Only service prices rose m/m in July, but the increase was the lowest recorded this year. Inflation moderation in services also pulled down adjusted CORE2 inflation to 0.15% m/m from 0.22% m/m in June, confirming the NBR’s inflation outlook for H2 2019.
Basically, after dropping below 4% y/y in June, CPI growth bounced back above that in July, mainly due to the government’s fiscal policy. Thus, inflation remained mostly driven by components outside the monetary policy influence. Core inflation slightly slowed m/m, supporting the central bank’s decision to hold the policy rate. Tobacco and meat imports were the major inflation drivers in July, partly cushioned by cheaper locally produced vegetables and gas. Still, more inflation-fuelling factors will perhaps occur in the following periods, because the government decided to introduce a new tax and to hike again tobacco excise. Even so, the NBR stuck with its year-end inflation projection at 4.2%, well above its 2.5%+/-1pp target band.