CPI Uptick in Q1 Projected for Romania After December’s Marginal Inflation Dip

In a recent report, Erste Group revealed a marginal dip in the inflation rate, projecting a Consumer Price Index (CPI) uptick in the first quarter of the year. The inflation rate eased to 6.6% year-on-year (y/y) in December, a slight decrease from 6.7% y/y in November. This figure landed marginally below both Erste Group’s initial prediction and the Bloomberg consensus, which were both at 6.7% y/y. The primary contributor to the forecast error was identified as the decrease in meat prices.

The positive surprises in CPI over the past two months have prompted Erste Group to revise its year-end inflation forecast downward to 4.8% y/y, a shift from the initial projection of 5.3% y/y. However, the report highlights potential downside risks to the near-term inflation forecast, primarily related to the discussed postponement of eliminating markups on basic food products, currently anticipated in February.

Erste Group emphasizes the likelihood of higher supply-side pressures in January due to recently introduced excise duties on non-alcoholic drinks with extra sugar, increased excise duties for alcohol beverages, gasoline, diesel, and tobacco products, along with a Value Added Tax (VAT) rate hike for organic foods and high sugar foods. If these changes pass through into final prices as anticipated, Erste Group estimates an impact of 0.7 percentage points on the annual figure, slightly lower than the central bank’s estimate of 0.9 percentage points.

Looking ahead, the report suggests that the National Bank of Romania (NBR) is expected to maintain the key rate at 7.00% in its upcoming Board meeting, aligning with unanimous consensus. Erste Group adheres to its forecast for the first rate cut in May, anticipating the key rate to reach 5.75% by year-end.

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Breaking down the monthly data, consumer prices experienced a 0.26% rise in December. The notable contributors to this increase were services, rising by 0.7% month-on-month (m/m) due to broad-based service price hikes. Food prices also edged up by 0.3% m/m, primarily influenced by the volatile component of fruit and vegetables. Meanwhile, non-food prices increased by 0.1% m/m, with more expensive electricity and heating offset by cheaper fuels.

Furthermore, Erste Group notes that adjusted CORE2 inflation, which excludes administered prices, volatile prices, tobacco, and alcohol, declined for the tenth consecutive month to 8.4% y/y in December, slightly below the projection of 8.46% y/y. Despite this decline, the report maintains the view that core inflation is expected to remain consistently higher than headline inflation throughout the forecast horizon.

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