The average consumer prices increased above expectations by 3.7% in April alone, while the annual inflation rate has advanced to 13.8% from 10.2% in March, the statistics office (INS) announced on May 11.

The food prices increased by 13.5% compared to April 2021 (YoY), the natural gas price soared by 85% YoY and the price of fuels by 35% YoY.

The worst is not over, though, and higher inflation readings are expected later during the summer.

In perspective, the central bank’s dovish 3.75% refinancing rate and even the 4.75% Lombard rate, reached after the moderate 75bp rate hike operated on May 10, look insufficient to curb the expected inflation - suggesting that more rate hikes are needed rather sooner than later -- while the next monetary policy meeting is scheduled no sooner than July 6.

The exogenous drivers (energy and food prices) may be dominant, but data suggest that they have spilt over quickly in the context of all sorts of financial support extended to households and companies by the authorities concerned about the effects of the Covid-19 crisis and the social impact of the rising energy prices. 

The adjusted CORE2 inflation, which reflects the prices under the effect of the monetary policy, has advanced to 8.3% in April from 7.1% in March - according to our estimates based on the data published by INS.

CORE2 inflation excludes from the consumer basket the goods with volatile prices (fruits, vegetables, eggs), the fuels, electricity, natural gas, tobacco and alcohol and the other goods with regulated prices.

The Lombard rate thus lags some 355bp below adjusted CORE2 inflation, which suggests that the consumer prices are already on an uncontrolled path that will spiral until the prices reach demand-side constraints (firms’ and households’ budgets) that were just relaxed by the authorities in the post-pandemic context.

Specifically, this will mean higher NPL rates, higher unemployment and lower real incomes, consequently lower retail sales and more corporate insolvencies.

The National Bank of Romania (BNR) will release its updated inflation outlook on May 12, but it already disclosed expectations for the headline inflation to remain in the double-digit area by the end of H2 of 2023. 

(Photo: Michaeljayberlin | Dreamstime.com)

iulian@romania-insider.com