Chart of the week: Romania’s inflation rate to stabilise amid economic slowdown

Romania’s annual inflation rate is expected to stabilize this year, after several years of rollercoaster-like evolutions. After negative inflation in 2015-2016, mainly due to tax cuts, the annual increase in consumer prices reached a peak in mid-2018. However, the economic slowdown is likely to keep inflation under control this year.

After the negative inflation episode in 2015-2016 prompted by external factors (the plunge in crude oil prices, quantitative easing programmes in both European Union and United States) as well as domestic tax cuts (VAT), the consumer price inflation in Romania accelerated, starting end-2016 to the peak at above 5% year-on-year in mid 2018, driven by domestic factors. These drivers were mainly on the demand side: households' disposable incomes (pushed up by administrative policies and tight labor market) as well as stronger consumer lending. There were also supply-side factors, though, such as the 15% rise of the energy prices (electricity, natural gas, heating) in one year (March 2017 to April 2018). Stronger demand for consumer goods pushed prices up, which reflected in the profit margins, profits and eventually in the "value added" generated by the trade sector. Toward the end of 2018, the inflation eased, helped by the energy (crude oil) prices, by the local currency's dynamics, and, to a large extent, by a change in expectations. In December, the headline inflation was 3.3%, and it remained close to the same level in January 2019.