RO: January CPI goes down to 5.0% y/y, supported by base effect

January CPI came broadly in line with our expectation at 5.0% y/y and decelerating from 5.1% in December 2024. The Bloomberg consensus median was at 4.9% y/y. Core inflation also came in line with our expectations at 5.1% y/y and broke a 4-month streak of stagnation around the 5.6% y/y value. We expect the disinflation process to continue in 2025 and we see end-year inflation at 3.7% y/y in a scenario with no additional fiscal changes that could affect inflation.

The NBR will announce its monetary policy decision for the second meeting of 2025 later today. A hold decision is unanimously expected, maintaining the key rate at 6.50%. Along with the decision, the NBR will release a new inflation forecast, likely to be published in full along with the Inflation Report on Monday. We anticipate an upward CPI forecast revision for the near term, reflecting the slightly higher year-end 2024 figure compared to the current projection, a view supported by the NBR's comments in January regarding a higher anticipated inflation path. Fiscal concerns, political noise and higher inflation are expected to keep the NBR in a wait-and-see mode throughout the first half of 2025. We expect the first rate cut at the August meeting, with a terminal rate of 5.75% for 2025.

The 2025 inflation outlook remains somewhat uncertain as fiscal measures taken by the government to address the large fiscal deficit are still on the table and could also influence the CPI. We think that another 0.7-0.8pp of GDP worth of fiscal consolidation are needed to reach the budget deficit target of 7.0% set by the government. So far, we only know about some excise duty hikes which already took place starting from January 1st and which should push the monthly rate up by around 0.4pp. The cap on markups for basic food items is set to expire at the end of June, with no confirmation yet on whether it will be extended. This could lead to a slight uptick in inflation, although the overall impact is likely to be minor. The future of energy price caps, currently scheduled to expire in April, also remains uncertain. While discussions about extending them are ongoing, no official decision has been made. Based on current trends, we project headline inflation to end 2025 at 3.7% y/y.

Adjusted CORE2 inflation (headline inflation minus administered prices, volatile prices, tobacco and alcohol), which is closely watched by the NBR, remained decelerated in January 2025 at 5.1% y/y after three consecutive months of stagnation. Diving deeper into CORE2 inflation components, we notice that core food inflation went down to 3.7% y/y in January, from 4.1% previously. The underlying inflationary pressures from core services and core non-food remained persistent, and the annual figures came at 6.7% y/y for both. We expect CORE2 inflation to end 2025 at 4.0% y/y. We stick to our view that core inflation should hover above the headline inflation for most of the forecast period.

In monthly terms, consumer prices edged up by 0.92% in January 2024. Food prices increased by 0.80% m/m mainly due to higher vegetable and fruit prices. Prices of non-food items inched up by 0.95% m/m mainly due to higher energy, fuel, and tobacco prices. Services prices rose by 1.02% m/m with a more broad-based profile.