Positive Romanian inflation data supports case for May rate cut

The March release brought positive developments regarding both food and services inflation. Food inflation fell from 4.4% to 2.8% - the first component to land in the inflation target corridor - marking a significant progress from the massive 21.5% recorded one year before in March 2023. Mild downside surprises in the fresh fruit and vegetables categories supported the reading.

As for services inflation, the progress was smaller , and it's still yet to go into single digits by a close margin, landing at 10.2%. Spread-out price pressures here are still a worry and a factor to watch going forward. And non-food inflation could now be a new source of concern, at least in the short term. It decelerated in monthly terms, yet it was the only category where price pressures picked up in annual terms. The sharp pick-up in demand for non-food items uncovered by January-February retail sales figures could be an important driver in the short term, as we discuss here. The March release also brought a smaller increase in fuel prices than we had expected, hence a larger increase reflected in the April numbers is likely.

Core inflation printed 7.1%, down from 7.6% in February, a slightly more pronounced deceleration than expected. We nevertheless see core inflation staying above the headline number for the rest of the year, though the gap between the two might be narrower than expected.