RO: Transitory inflation uptick driven by supply-side factors

Inflation accelerated to 5.4% y/y in July, from 4.9% y/y in June, mostly due to costlier energy prices after fuel excise duty hike. We see it as a temporary pick-up, with inflation resuming its downward trend thereafter. According to our estimates, the fuel excise duty hike impacted the annual CPI figure by almost 0.3pp. Consumer prices rose by 0.6% m/m. The CPI reading came above both our forecast of 5.2% y/y and the Bloomberg survey median of 5.1% y/y. The upside surprise on our side came from flat vegetables prices which usually post a seasonal decline in July and higher regulated prices for electricity and natural gas. Core inflation declined by about 0.2pp to 5.5% y/y in July, 0.1pp less than we had projected.

Last week, NBR cut the key rate by 25bp to 6.5%, in line with our call, surprising Bloomberg survey consensus expectations for no change. We continue to expect a 25bp rate cut at each of the two remaining meetings for the current year. However, we see a risk of only one cut if inflation surprises to the upside. The NBR governor Isrescu considers the current monetary policy stance relatively restrictive even after two 25bp rate cuts.

Adjusted CORE2 inflation (headline inflation minus administered prices, volatile prices, tobacco and alcohol), which is closely followed by the NBR continued to decelerate in July to 5.5% y/y, from 5.7% y/y in June, 0.1pp less than we anticipated. Our adjusted CORE 2 inflation estimate for December stands at 4.8% y/y vs 4.6% y/y projected by the central bank. Core services inflation decelerated by 0.4pp to 7.8% y/y in July, while the underlying inflationary pressures from core non-food items eased by 0.3pp to 7.5% y/y. Core food items inflation declined by 0.1pp to 1.9% y/y.

In monthly terms, consumer prices picked up by 0.6% in July. Prices for non-food items went up by around 0.9% m/m mostly driven by a hike in excise duties on fuels and higher regulated electricity and natural gas prices. Food prices inched up by 0.1% m/m due to costlier meat and despite the monthly decline of fresh fruit prices. Services prices rose by 0.7% m/m on the back of a broad-based services price increase. Among them, air transport and administered water and sewerage services had the most notable monthly increase in July.

We continue to see inflation rate ending this year at 4.0% y/y. The NBR has recently updated its medium-term inflation outlook with the new quarterly Inflation Report. The central bank revised its inflation forecast downwards to 4.0% y/y for December 2024, from 4.9% previously and projects end-2025 CPI at 3.4% y/y, slightly down from 3.5% y/y vs 3.7% y/y our forecast. Core inflation is projected by the NBR to stay above headline inflation most of the time during the entire two-year-ahead projection horizon.

We see risks to the inflation outlook coming from both directions. Energy prices remained volatile in recent months following legislative changes implemented as of April and might remain so in the near future adding a high degree of uncertainty. Brent oil prices curve has shifted downwards in July vs June but given the still ongoing conflicts in Ukraine and Middle East an upward shift later this year is not out of the equation. Political factors should also play an important role for inflation trajectory in 2025 as the government needs to bring additional revenues to address the large fiscal deficit.