RO: June CPI falls further to 4.9% y/y

June CPI came in at 4.9% y/y, from 5.1% y/y in the previous month. This is 0.1pp above market consensus, which was at 4.8% y/y, but in line with our expectations. In monthly terms, consumer prices went up by 0.24% due to a sharp increase in natural gas prices, while the electricity prices surprisingly decreased in monthly terms despite the announced increase in system services tariff. Food prices were down in monthly terms with the effect mainly attributed cheaper vegetables, with the seasonal factor playing an important role. Core inflation fell to 5.7% y/y in June, from 6.3% in May, in line with our projection.

We maintain our year-end call at 4.0% y/y after todays reading, but we see risks for a potential upward revision dependent on further natural gas and electricity prices dynamics. We also maintain our core inflation forecast for end-2024 at 4.9%.

The implications of June CPI reading on future NBR decisions are mixed. On one hand, the reading is significantly below current NBR forecast, which is an argument in favor of our baseline of three more 25bp rate cuts this year bringing the key rate at 6.00% by year-end. Furthermore, in the most recent press release following the July meeting the NBR acknowledges that the latest assessment of the annual inflation rate shows a lower path. But on the other hand, the CPI outlook is clouded by the volatile administered energy prices (especially natural gas prices) due to the nature of the law put in place at the end of March regarding the way the price is determined. Because of this, we see some chances (~30%) of one less cut this year.

Adjusted CORE2 inflation (headline inflation minus administered prices, volatile prices, tobacco and alcohol), which is closely followed by the NBR continued to decelerate in June to 5.7% y/y, from 6.3% y/y in May, in line with our expectations. Core services inflation decelerated by 0.5pp to 8.2% y/y in June, while the underlying inflationary pressures from core non-food items eased by 1.1pp to 7.8% y/y. Core food items inflation also went down by 0.5pp with a reading at 2.0% y/y. Our adjusted CORE 2 inflation estimate for December stands at 4.9% y/y. Hence, we stick to our view that core inflation should hover above the headline inflation over the entire forecast horizon.

In monthly terms, consumer prices edged down by 0.24% in June. Prices of non-food items went up by around 0.5% m/m amid higher regulated natural gas prices and despite the monthly decline of fuel prices. Food prices inched down by 0.2% m/m due to cheaper vegetables. Services prices increased by 0.4% m/m on the back of a broad-based services price increase.