RO: Inflation’s Gas-tly surprise: Natural gas prices pump up the pain

February's CPI remained unchanged at 5.0% y/y, exceeding market consensus of 4.7% y/y and our own expectation of 4.9% y/y. This overshoot was primarily driven by higher-than-anticipated natural gas prices, which rose 9.1% m/m vs 5.0% m/m our expectation. Core inflation decelerated slightly at 5.0% y/y in February from 5.1% in the previous month, in line with our view. Because consumer prices for natural gas are tied to market prices up to a cap of 0.31 lei/kWh, we anticipate this price increase to reverse in the coming months. Therefore, we keep our year-end CPI forecast of 3.7%, though we acknowledge upward risks to this projection.

The NBR recently revised higher the inflation projection for the next 12 months. In NBRs view the annual inflation rate will end the year at 3.8%. We believe that February inflation came as a negative surprise for the NBR as well. Core inflation might be slightly above NBR expectations as the current projection has 4.8% at the end of 1Q25. In this context, the NBR might feel less inclined to cut interest rates this year. We continue to believe that the first rate cut of 25bp will be at the August meeting, but the 5.75% terminal rate for this year might be at risk of ending higher.

Adjusted CORE2 inflation (headline inflation minus administered prices, volatile prices, tobacco and alcohol), which is closely watched by the NBR, decelerated marginally in February at 5.0% y/y from 5.1% previously. Diving deeper into CORE2 inflation components, we notice that core food inflation went up to 3.9% y/y in February, from 3.7% previously. Core services inflation accelerated slightly at 5.9% y/y from 5.8% y/y and core non-food moved down to 5.6% y/y from 6.4% y/y. We expect CORE2 inflation to end 2025 at 4.0% y/y but we see upside risk dependent on second round effects from global raw material prices evolution. 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 0.88% in February. Food prices increased by 0.73% m/m mainly due to higher vegetable and dairy product prices. Prices of non-food items inched up by 1.08% m/m mainly due to higher energy, fuel, and tobacco prices. Services prices rose by 0.66% m/m with a more broad-based profile.