Energy and food prices push up Romania's inflation to 3.75% in May

Romania's headline inflation advanced by 0.5pp in May, to 3.75% from 3.24% in April - gaining momentum from the 0.2pp advance seen in the month before.

The figures exceeded expectations (3.57% Bloomberg poll), and another shock is expected in July when the electricity and natural gas prices will further rise. Food prices may also contribute given the global developments.

Analysts revised upward their forecast for year-end inflation, but the expectations for refinancing rate hike in the near term are still marginal "as long as fiscal consolidation continues" and the liquidity control instruments remain effective.

"Inflation in Romania is becoming a quite serious issue. Looking ahead, inflation will remain above 4% starting in the second half of this year and could even touch the level of 5% in the last quarter," says Valentin Tataru, chief economist of ING Romania, quoted by Profit.ro. The Dutch bank now projects year-end inflation of 4.7%, compared to 4.3% as previously estimated.

Ciprian Dascălu, BCR Bank chief economist, says that the figures for June "are essential for the evolution of short-term inflation" due to the expected utility price increases. BCR increased its forecast for the end of the year from 4.3% to 4.5%.

Banca Transilvania, which provides a forecast only for the harmonized EU consumer price index, has increased its estimate for this year from 2.6% to 2.9%.

At this moment, the HIPC inflation in May rose to 3.2% YoY from 2.7% YoY in April. The food prices increased by only 1.5% in Romania as of May in annual terms, but the 1.1% monthly advance (against the seasonal pattern) was mainly responsible for the largest part of the momentum the overall inflation gained in the month compared to April.

In contrast, the non-food prices and the fees paid for services advanced more moderately by only 0.27-0.28% in May, compared to April.

Returning to annual terms, the main drivers for the 3.75% inflation were the energy prices (electricity, fuel) and the higher tobacco excises. Thus, the fuel and electricity prices increased by 11% and 17%, respectively, contributing 1pp and 0.8pp respectively - meaning nearly half of the headline 3.75% inflation. Higher tobacco excises resulted in 7% higher tobacco prices and contributed 0.46pp to the overall inflation.

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