Romanian inflation keeps rising

As usual and as everywhere lately, inflation continues to surprise to the upside. At 8.4%, the January 2022 inflation rate is the highest in the last 14 years and the peak is still ahead of us.

The 0.4ppt forecast error on our side came largely from natural gas prices which advanced by over 6.00% compared to the previous month, versus our call for flat monthly prices. Again it seems that the inner mechanics of a liberalised, but temporarily capped market are still eluding our attempts to estimate price moves. A 1.3% monthly increase in tobacco prices and 6.4% in heating energy have also taken us by surprise a bit.

Key to the inflation path going forward will be the administrative measures already under discussion to curb energy prices in particular. The latest official statements suggest that policymakers will attempt to take the needed measures in order to prevent double-digit inflation this year. In the short term, the most effective would most likely be a VAT cut (targeted or broad-based), but the action plan will likely be more complex than that.

In its latest Inflation Report, the National Bank of Romania forecast headline inflation to exceed 10% in the second and third quarters of 2022, under the assumption that current support measures for households will not be prolonged. However, as these measures will most likely be extended in one form or another, we believe that an eventual peak of inflation above 10% will be rather short-lived. Nevertheless, this will also mean that the downward trajectory of inflation will be less abrupt. We do not foresee headline inflation re-entering the NBR’s target range of 1.5%-3.5% before mid-2024.