Romania’s headline inflation sinks into negative territory on low energy prices

Romania’s headline inflation sinks into negative territory on low energy prices
By bne IntelliNews March 11, 2016

Consumer price inflation in Romania dropped to negative 2.7% y/y in February from the negative 2.1% y/y in January, the statistics office INS reported on March 11. Annual inflation - the y/y rise in the average prices calculated for the past 12 months - shifted to negative 1.1% y/y in February from negative 0.8% one month earlier.

Consumer prices dropped by 1.0% ytd. While the annual inflation is visibly the effect of the massive 15pp cut in the VAT rate for food last June, the slide of consumer prices more recently is driven by energy prices (utilities included) and, to a smaller extent, lower telecom tariffs.

Out of the 1.0% ytd drop in consumer prices in January-February, a significant 0.68pp contribution was made by the decline in prices of car fuels (-4.3%), electricity (-2.9%), natural gas (-3.2%) and heating (-3.4%). These energy goods account for 18.4% of the consumption basket.

The sharp 8.2% cut in the regulated prices of utilities also had a significant impact on the overall consumer price index: 0.26pp of the 1.0% ytd inflation. Telecom tariffs have dropped by 3.7% ytd, partly due to decisions of the market regulator, and contributed a negative 0.16pp to the 1.0% ytd inflation.

By contrast, food prices increased on average by 0.81ytd on a seasonal trend. But thanks to the 15pp cut in the VAT rate last June, they are still 6.5% down y/y.

The prices of non-food goods decreased on average by 1.8% ytd and 0.5% y/y mainly due to the drop in the energy prices.

Services fees, in principle pushed upward by the rising incomes of households, decreased by only 0.3% y/y compared to a 3.2pp impact expected from the 4pp cut in the VAT rate in January. In January-February, however, the fees dropped by a significant 2.6%.

Romania’s central bank revised upward the projected yearend inflation by 0.3pp to 1.4% at the end of this year while announcing a 3.4% target for the end of 2017, under the Inflation Report issued on February 9.

Inflation at the end of 2014 was -0.9% y/y, 0.2pp below the central bank’s projection under the previous Inflation Report issued in November. The forecast error is due mainly to the larger than expected fall in volatile food prices, the monetary authority explained.