Romanian inflation plateaus; wages advance robustly

We estimated July inflation at 14.6%, the same as the market consensus. On our side, the forecast error came entirely from gas and electricity prices which the Statistical Institute estimated to have increased by 8.2% and 2.8%, respectively, versus our no-change forecast.

Somewhat surprisingly - but in line with our estimates - monthly food inflation accelerated in July to 0.9%, from 0.6% in June, with some diverging dynamics taking place in different subgroups. While prices for fresh fruit, oil and most vegetables accelerated more than expected, other items such as milling and bakery products, meat and especially potatoes came below our estimates. Overall, the usual summer disinflation effect on some food prices looks to be less pronounced this year.

Since June, inflation seems to have reached a plateau and we expect numbers very close to current levels until September. Whether the actual peak was in June, at 15.1%, or August, at 15.2%-15.3%, is probably less relevant. What matters more in our view is that the overall inflationary trend seems to have peaked and that we should embark on a gradually descending path from October. Our 13.0% estimate for average 2022 inflation looks on track and we believe that the year-end number could come in lower than the National Bank of Romania's 13.9% estimate.

We don’t think that today’s slightly higher-than-expected inflation will change the NBR’s policy. In presenting the August Inflation Report today, NBR Governor Mugur Isarescu had quite a few dovish remarks, essentially signalling that there is limited room ahead for additional tightening. The dovish stance came despite the inflation forecast being revised higher: from 12.5% to 13.9% for 2022 year-end and from 6.7% to 7.5% for 2023 year-end. However, inflation should continue to descend and is set to reach the NBR’s mid-point of its 1.5%-4.5% target range by June 2024. While we agree that inflation could indeed enter the NBR’s 1.5%-4.5% target range by the end of the two-year forecast horizon, printing as low as 2.3% by mid-2024 seems a bit optimistic. 2024 will be a very important electoral year and the chances for the fiscal stance to turn inflationary even as early as 2023 are not negligible.

We’ve been arguing quite a few times that despite the inflation spike, wage advances in 2022 would not be that far from beating inflation. In all fairness, this argument came more often when inflation estimates did not exceed 10%, but even as it became clear that inflation would turn higher, we maintained our optimistic outlook on the labour market.

In the first half of the year, net average wages advanced by 11.1% while average inflation for the same period was 11.7%. Basically, average wage growth started to be below inflation only in April this year. The trend, however, is clearly for the advance in real wages to remain in minor negative territory for the rest of the year. Nevertheless, with average 2022 inflation estimated by us at 13.0% and the average wage advance at 12.0%, real wage dynamics are definitely not as bad as one feared at the beginning of the year.

By selected categories, the picture looks somewhat in line with expectations. The seasonal HORECA sector will likely show a less impressive performance once the summer season ends, which leaves the IT and trade sectors clearly outperforming the other sectors. We do notice the relatively small public sector wage advances which should be a sign of much-needed fiscal discipline. However, to put things into perspective, most public sector employees already earn above-average wages. Moreover, with the very important electoral year of 2024 already looming, it is rather unlikely that public wage dynamics will remain in this low single-digit area in 2023 and 2024.