What causes inflation in Romania? Central Bank Governor Isarescu says changes in taxation and utility prices played “significant role”

The changes in indirect taxation and regulated utility prices in Romania have played a significant role in the recent inflationary spell, adding to the underlying inflationary pressures stemming from the opening of the positive output gap, due mainly to expansionary fiscal policy, National Bank of Romania (BNR) governor Mugur Isarescu said on May 14 in Bodrum, Turkey, at the ”The 39th Meeting of the Central Banks Governors’ Club of the Central Asia, Black Sea region and Balkan countries”.

Isarescu’s comments offer some details about the central bank’s view on inflation, after a dispute involving the government regarding the recent prices increases in Romania.

He noted that inflation has spiked in Romania and Turkey, where it currently stands at 5 percent and 11 percent respectively.

“Part of this reemergence is related to the global cycle, as it comes from international commodity prices, with idiosyncratic supply-side factors and domestic demand pressures accounting for the rest of the explanation. These latter two sources are particularly relevant in Romania, where changes in indirect taxation and regulated utility prices have played a significant role in the recent inflationary spell, adding to the underlying inflationary pressures stemming from the opening of the positive output gap (to which contributed a persistently expansionary fiscal policy), increases in wage costs, and, last but not least, an upward adjustment in inflation expectations,” Isarescu said, according to a transcript of his speech.

The speech in Bodrum was held only ten days after a meeting in Bucharest between the president of the ruling PSD and the Chamber of Deputies, Liviu Dragnea, National Bank governor Mugur Isarescu and PM Viorica Dancila, on the subject of the status and development of the Romanian economy.

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The talks lasted more than three hours, and Liviu Dragnea said at the end that the meeting was very useful and that the participants agreed that the main causes for the rise of inflation were “exogenous factors” like gas, energy or oil prices, which have a massive contribution to inflation and are not controlled by neither the government nor the central bank.

They also agreed that the two institutions to meet more frequently and for the government to meet with BNR representatives before taking any new economic measures, according to Dragnea.

But Isarescu pointed out in Turkey that wage increases in Romania, mostly due to government policies, is a key factor not only for rising inflation, but also for the deterioration of the current account deficit.

“As a matter of fact, significant acceleration in wage growth is a common feature of the non-euro EU member group. Nevertheless, in most cases this has not led to a deterioration in the current account positions, which remained in surplus. Unfortunately, Romania appears as an outlier within the group: while its current deficit is well below pre-crisis levels, it widened rapidly from a minimum of 0.7 percent in 2014 to 3.4 percent in 2017, which puts Romania closer to the group of EU candidate countries (around 5.5 percent in Serbia and Turkey),” Isarescu said.

Romania’s annual inflation rate rose to 5.2 percent in April, a record level since June 2013, energy prices increases having a large contribution to the evolution of consumer prices, official data showed.

Compared with March, the biggest price increases were recorded for natural gas (4.3 percent), fresh fruits (2.7 percent), tobacco products (2.4 percent) and fuels (1.6 percent).

The price of natural gas for households rose by 10.2 percent compared to December 2017, after Romania’s energy regulator decision to increase the natural gas prices paid by household consumers.