RO: August inflation decelerated, in line with our call, slightly above consensus

The inflation rate decelerated in August to 5.1% y/y, from 5.4% in July, due to favourable base effect and cheaper fresh fruit and fuels. The CPI reading came in line with our forecast of 5.1%, but slightly above the Bloomberg survey median of 5.0% y/y. Consumer prices rose 0.24% m/m. Core inflation inched up by about 0.3pp to 5.8% y/y in August, as we projected, afterunderlying inflationary pressures from core food items edged higher. We continue to see inflation rate ending this year at 4.0% y/y, but risks are titled to the upside due to prospective energy price dynamics (natural gas, in particular) following legislative changes implemented as of April. In our baseline scenario, we incorporated a drop in natural gas prices in September, in line with TTF natural gas forward curve. We expect a 25bp key rate cutin the upcoming board meeting scheduled for October 4, from 6.5% currently.

Adjusted CORE2 inflation (headline inflation minus administered prices, volatile prices, tobacco and alcohol), which is closely followed by the NBR increased in August to 5.8% y/y, from 5.5% y/y in July, in line with our expectations. Core food items inflation accelerated by 1.2pp to 3.1y/y, core non-food inflation eased by 0.1pp to 7.3% y/y, while core services inflation inched up by 0.1pp to 7.9% y/y. Our adjusted CORE 2 inflation estimate for December stands at 4.9% y/y vs 4.6% y/y projected by the central bank.

In monthly terms, consumer prices rose by 0.24% in August. Food prices went up by 0.45% m/m, mostly due to costlier vegetables and citrus prices. Prices of non-food items was almost flat compared to a month ago, after the decline in fuels prices were counterbalanced by more expensive electricity and hygiene, cosmetic and medical items. Services prices increased by 0.51% m/m on the back of a broad-based services price increase, except for administered water and sewerage services prices which posted a modest monthly decline in August.