RO: We revise upward year-end inflation forecast to 4.9%

October CPI brought a negative surprise, inching up to 4.7% y/y from 4.6% in September. This is above our call of 4.4% y/y and Bloomberg survey median of 4.6%. In monthly terms, consumer prices edged up by 0.62%. Most of the forecast error from our side came from volatile food items. Severe weather conditions continue to put upward pressure on food prices with vegetables recording the third consecutive month with a more then 2% monthly increase and fruit prices posting the second consecutive month with around 3% rise. Fuel prices also rose slightly faster than we anticipated. Considering the recent data and persistent upside pressures from volatile food prices, we revise up our year-end inflation forecast at 4.9% y/y from 4.5% y/y previously.

We see the next NBR rate cut in the second quarter of 2025, though the interest rate outlook is a function of the structure, timing, and size of the widely expected fiscal consolidation package, which should be presented by the new government after the general and presidential elections. Provided that the structure of the fiscal adjustment dampens the domestic demand pressures, there could be room for the NBR to cut rates in the first quarter. However, some of the fiscal measures are likely to have a short-term inflationary impact.

We anticipate that spillovers from the bad agricultural year should continue to be felt and food prices are likely be the main inflationary risk into the year-end. The recently updated NBR inflation forecast matches our projection in the medium and short run. The CPI outlook for 2025 is clouded by the likely fiscal consolidation measures that should be adopted by the Government in order the address the large fiscal deficit. For example, a hike in indirect taxes is pro-inflationary, while a fiscal adjustment via direct taxes helps bringing inflation lower. We hold to our CPI forecast of +3.7% by end-2025 based on the current fiscal framework.

Adjusted CORE2 inflation (headline inflation minus administered prices, volatile prices, tobacco and alcohol), which is closely watched by the NBR, remained flat in October at 5.6% y/y, above our projection of 5.4% y/y. Diving deeper into CORE2 inflation components, we notice that core food inflation continued to drift higher for the third month in a row in October to 3.4% y/y, from 3.3% in September. The underlying inflationary pressures from core services and core non-food remained persistent, and the annual figures remained unchanged at 7.4% y/y and 7.0% y/y respectively. We revise marginally CORE2 inflation estimate for December to 5.2% y/y, up from to 5.1% y/y previously. 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 up by 0.62% in October. Food prices increased by 0.75% m/m mainly due to costlier vegetables and fruit. Prices of non-food items went up by 0.53% m/m mainly due to higher fuel prices. Services prices rose by 0.59% m/m with a more broad-based profile.