Romania’s consumer price inflation eased to 1.88% y/y in September from 3.67% y/y in August, the statistics office reported. Consumer prices dropped for a third consecutive month, by 0.6% m/m in September. While the enforcement of preferential VAT rate for food had a visible impact, the weak demand, strong local currency and the certain decline in global commodity prices are the other significant drivers of disinflation.
The cut of VAT rate on bread from 24% to 9% had a significant contribution to disinflation. Filtering out the impact of lower bread price*, the annual inflation would have been 2.52% y/y in September [down from 3.67% y/y in August], according to our calculations. The consumer prices would have edged up by some 0.1% m/m in September.
Food price deflation driven by record crops in Romania and abroad plus the VAT rate cut for bakery contributed significantly to the recent disinflation – but the CORE 2 inflation and the adjusted CORE2 inflation are also at their lowest level in the two post-communist decades.
CORE2 inflation was 2.9% y/y in August – latest available data. Adjusted CORE2, calculated by the central bank to filter out even more of the volatile prices from CPI basket, was 2.2% y/y. Adjusted CORE2 eased by 1pps since the end of last year.
A key driver for the current deflation is the subdued demand. Private consumption stagnated in H1 – but the retail sales gradually lost ground to minus 0.1% y/y in Q1 and minus 1.8% y/y in Q2. Another important driver for disinflation in Jul-Sep was the exchange rate’s dynamics. The local currency has strengthened versus the euro nominally - by 2.8% y/y in July, 1.8% y/y in August and 0.9% y/y in September.
Finally, the inflationary pressures from industry [production side] eased substantially as the industrial price inflation slowed down to o.6% y/y in August. The industrial prices for industrial goods traded [imported/exported] on foreign markets decreased on the year in each of the past five months [April-August].
* which was also a result of lower wheat price this year and expected low grain prices for the coming months
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