Romanian inflation: Temporary acceleration, persistent stickiness

Romanian inflation accelerated to 5.4% in July from 4.9% in June. Food inflation inched up to 1.7% from 1.1%, still remaining well-behaved. Non-food inflation picked up to almost 7.0% from 6.3%. Services inflation moderated to 8.5% from 8.8% - remaining quite sticky. Core inflation consolidated below 6.0% for a second consecutive month, but its progress towards target remains slow.

On a monthly basis, noteworthy developments came in from energy and fuel prices, which rose at a slightly smaller pace than we had expected. Fuels increased by almost 3%, electricity 1.1%, and gases 1.1%, all adding roughly 0.3pp to the headline annual measure. As for food prices, flour, sugar and meat added upside pressures. On the services front, prices picked up at the strongest monthly pace since February, showing a persistent stickiness across most items; water, sanitation, and airfares stood out particularly this month.

Looking at the consumer basket more broadly, two things can be noted. The first, a positive, is that most of the current increase is of a temporary nature, driven by energy and fuel excises, and will likely have only a short-term impact on the disinflation process. The second one, a negative, is that after keeping out these likely temporary factors, inflation would not have progressed towards target. This is in line with our view that price pressures are likely to become more stubborn as we continue to approach 4%.

Today’s wage growth data (12.5% YoY) continues to add to the medium-term risks of services inflation.  

As for the outlook, we expect the August print to show some mild improvements before we see more solid advances towards our 4.2% year-end forecast in September-October. From here onwards, our view is that the stimulative nature of wage growth, strong credit activity and loose fiscal policy is set to make the battle against still-sticky inflation quite challenging. Indeed, some downside pressures from the weaker state of the export-driven manufacturing growth will matter, too. However, the near-term strength of internal demand will likely keep firms’ confidence in their pricing power in place ahead of next year’s expected increase in the tax burden.

Concerning the NBR, while the policy space we envision could allow the central bank to make another 25bp rate cut in autumn, our base case is that the dangers stemming from medium-term upside risks will likely rank higher on the policymakers' agenda at the next decision.