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These factors come from the demand side.

On top of all these factors, a shortage of commodities (metals, oil, natural gas etc.), due to companies' efforts to fully resume production and meet high consumer demand, augmented inflation as well.

Moreover, the war started by Russia in Ukraine also feeds the inflation, on the one hand, because both countries are producers and exporters of commodities and, on the other, because of shortfalls on adjacent maritime networks.

So, this pretty much sums up the way the supply-demand balance has been heavily skewed in late 2021 and coming into 2022.

Basically, the 2021-2022 inflation has been acting as the perfect storm or like a mutant that fed on what it found in its path.

And when it comes to Romania, inflation here has followed the same pattern, perhaps with two specific aspects:

Romania's inflation rate is obviously also influenced by the war in Ukraine, although not entirely. The influence of the war in Ukraine comes from the fact that it keeps gas and oil prices, delivered to Europe, high and the price of gas in Romania is linked to the Vienna stock exchange.

Romania's high inflation is also influenced by its excessive imports. Romania is a market with a very high share of consumption in GDP, around 90%, and much of this consumption comes from imports, originating mainly from the EU.

Although the NBR keeps the exchange rate stable, Romania still imports inflation because the EU area also has inflation, meaning that the products Romanians buy are already intrinsically expensive. (Eurozone CPI inflation in March 2022 was 7.5%.)

II. Effects of inflation and measures against it

In theory, high inflation is being addressed by 2 broad categories of measures:

• monetary policy measures, taken by central banks;
• fiscal policy measures, taken by governments.

But before implementing such measures, one should always remember their inverse correlation with economic activity (growth): too abrupt measures against inflation can affect the demand for goods and services, thereby hindering economic growth.

On the monetary policy side, we have already seen that, in recent months, central banks have gradually started to reduce their purchases of government securities (reducing the pace of money creation) or raise monetary policy interest rates, to make money more expensive and thus hinder consumption.

These measures will gradually put pressure on consumption, especially consumption based on credit. And the reduced demand for goods and services will adjust prices over time.

What's next in the short term:

• Some prices might rise further, where demand is inelastic, i.e. people will buy anyway, regardless of price (basic food, utilities or luxury goods);
• some prices may stagnate or correct, where demand is elastic or where products can be substituted (e.g. combustion cars vs. electric cars etc.).

In the medium to long term, however, commodity prices, as production returns to normal, supply chains recover, and consumption adapts to elevated prices, are expected to stabilise or even revert to pre-pandemic levels.

When it comes to fiscal policy measures, i.e. tax hikes coupled with budget spending cuts, they will be delayed in order not to jeopardize economic growth. However, at some point, such measures will also have to be enacted, especially in countries with budget deficits that are becoming unsustainable.

Such is the case of Romania, whose public debt has exceeded 50% of GDP for the second month in a row. And while being back on Romania’s stance again, it is worth mentioning some recent inflation measures of its own, plus some social alleviation measures taken as well.

If gas and electricity price caps are measures that have been tempering inflation, a question inevitably arises as to how effective the latest social alleviation measures, announced by the governing coalition, will be. And the answer is: it depends. It depends on how effectively will the funds in the support programme be absorbed.

At first glance, the balance tilts towards inflationary effects, in view of the large share of money going to the population in the form of vouchers, i.e. consumption (over €1 billion in vouchers alone).

On the other hand, the degree to which Romanian companies and farmers will have easy access to the promised subsidies and grants could further offset the inflationary effect of vouchers in the economy.

Therefore, it is most likely that Romania, through the implementation of such a social programme, will delay the reduction of its inflation, while hoping to maintain a somewhat more robust (mainly consumption-driven) economic activity.

III. The role the population and companies play and measures to be taken

When it comes to the population and what the population can do to get through this period better, here are a few brief ideas:

• private individuals should postpone major expenditures that may destabilise the financial balance of the household, especially if the income earners are working in areas vulnerable to economic slowdown or recession (leisure, trade of durable consumer goods etc.);
• making spending as efficient as possible, from the classic switching off the light when leaving the room, buying food in quantities that prevent excess, preparing food at home, to fewer visits to clubs etc.;
• reduce debt as much as possible, now when the financial situation is good. Where there are some savings alongside the loans, it is worth using parts of the former to make some partial repayments on the latter (to reduce interest costs);

When it comes to companies, it is obvious that they should also approach this period cautiously, especially when it comes to their level of debt (preferably, they should tap into more equity capital or European funds), as interest rate increases by the National Bank are still possible this year.

The primary target of all companies should be to increase their productivity through digitalisation, new technologies and staff training. Productivity is the most effective remedy against inflation.

Other inflation protection solutions for individuals and businesses can be found on the author's social pages, Facebook or LinkedIn.

by Andrei Buruiana, contributor

Andrei Buruianăis a seasoned professional in financial services, with 15 years of experience, having covered:

• Investment & Pension Fund Management;
• Retail Banking: Wealth Management & Private Banking, Product Management and Business Planning;
• Project Finance: EU Funds;
• Training & Consulting (currently), covering: Personal Finance, Sales and Ledership.

Andrei is also a content creator and contributor on several Romanian business & economics platforms. He has a Bachelor’s degree in International Business & Economics, from the Bucharest University of Economic Studies.

(Opening photo source: Vlad Ispas | Dreamstime.com)