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Developments in inflation and its determinants


The annual CPI inflation rate continued its strong upward trend in 2022 Q1, increasing by 1.96 percentage points to reach 10.15 percent in March (from 8.19 percent in December) in a context of global broad-based inflationary pressures.


Behind this rise stood mainly the pick-up in production costs as a joint result of the energy crisis that emerged in mid-2021 and the shock wave sent to commodity markets (especially energy and agri-food markets) by the Russia-Ukraine conflict.


Against this background, in January-March 2022, the annual adjusted CORE2 inflation rate went up by 2.4 percentage points to 7.1 percent. Conversely, during this period, exogenous components made a modest contribution to inflation (0.5 percentage points), with the impact of the fast-paced advance in commodity prices being largely mitigated by the extension of the compensation and capping scheme for households’ utility bill in February 2022.


Compared to the forecast in the February 2022 Inflation Report, in March the annual rate of increase of consumer prices was markedly higher (10.2 percent against 8.0 percent). In turn, the average annual inflation rate went up visibly: the indicator calculated based on the national methodology came in at 6.5 percent in March (from 5.1 percent in December 2021), while that calculated based on the Harmonised Index of Consumer Prices (HICP) amounted to 5.6 percent (from 4.1 percent at end-2021), i.e. equal to the level recorded by Latvia, but nevertheless lower than the HICP inflation rates in Lithuania, Estonia, Hungary and Poland.


Mounting pressures from supply-side factors and worsening inflation expectations led to a faster pace of increase of adjusted CORE2 inflation in 2022 Q1, whereas demand conditions in the economy, as shown by the narrow output gap, played a modest part.


Production costs reflected significantly higher costs of commodities, transport and utilities. Their pass-through to prices was the fastest for food items, given, on the one hand, the less elastic demand for such goods and, on the other hand, the sector’s high exposure to movements in commodity prices.


Considering the price-setting behaviour in the Romanian economy, food price hikes are further expected for several months to come. At the same time, labour costs may also face pressures, with the increase in the minimum wage economy-wide being reflected in the wage dynamics in the first part of the year alongside the fast rise in inflation, the influence of which becomes visible in the context of employment contract renegotiation.


Unit labour costs economy-wide saw a new slowdown in their negative annual dynamics in 2021 Q4, to -6.2 percent (from -10.6 percent in the prior quarter). The path of this indicator is, nevertheless, further distorted by the methodological change in the statistics of employed persons1 at the beginning of the previous year.


The dynamics of the indicator calculated by excluding this effect2 show an acceleration from -1.0 percent in Q3 to 4.3 percent, without exceeding, however, the pre-pandemic values. January through February 2022, the annual growth rate of unit wage costs in industry remained high (9.5 percent), similarly to 2021 Q4, amid the advance in wage dynamics.


Monetary policy since the release of the previous


Inflation Report In its meeting of 9 February 2022, the BNR Board decided to raise the monetary policy rate to 2.5 percent per annum from 2 percent and to maintain firm control over money market liquidity. Furthermore, the symmetric corridor of interest rates on standing facilities around the monetary policy rate was kept at ±1 percentage point.


The annual CPI inflation rate continued to rise above the upper bound of the variation band of the target in December 2021, climbing to 8.19 percent from 7.8 percent in November and 6.29 percent in September. The pick-up in the annual CPI inflation rate during 2021 Q4 was mainly caused, this time again, by exogenous CPI components, particularly by the hikes in natural gas and electricity prices, as well as in fuel prices – primarily on account of the non-petrol-diesel subgroup –, to which added more modest influences from VFE prices and administered prices.


In its turn, the annual adjusted CORE2 inflation rate followed a slightly higher upward path in 2021 Q4, reaching 4.7 percent in December from 3.6 percent in September. Its dynamics further reflected the effects of the rise in agri-food commodity prices and energy and transport costs, as well as the influences of persistent bottlenecks in production and supply chains, compounded by increasingly higher short-term inflation expectations and the large share of imported goods in the CPI basket.


The latest forecast, which is based on the available data and the regulations in force, showed a considerable worsening of the short-term outlook for inflation, under the strong impact of supply-side shocks, mainly of energy prices.


The main uncertainties and risks to the inflation outlook stemmed from the fiscal policy stance, given the coordinates of the budget programme aiming at the progress in fiscal consolidation in line with commitments under the excessive deficit procedure, yet in a challenging economic and social environment domestically and globally.


Another relevant risk factor remained the evolution of the pandemic, amid the ascending phase of the infection wave triggered by the Omicron variant of the coronavirus. Moreover, a major source of uncertainties and risks continued to be the absorption of EU fun(Please find full report on: ///home/cristiana/Desc%C4%83rc%C4%83ri/Summary%20IR%20May%202022.pdf)ds, especially those under the Next Generation EU programme, where disbursements are conditional on the strict fulfilment of milestones and targets.


Subsequently, the annual CPI inflation rate continued to rise gradually in the first two months of 2022, climbing to 8.35 percent in January and to 8.53 percent in February.


This time round, exogenous CPI components had a disinflationary contribution overall, following the slower pace of increase of electricity and natural gas prices, amid a base effect and extended price capping schemes, which outweighed considerably the influences of the relatively more pronounced hike in fuel prices, VFE prices and administered prices.


The annual adjusted CORE2 inflation rate followed a faster-than-expected upward path in the first two months of 2022 Q1, going up to 5.2 percent in January and to 5.9 percent in February, from 4.7 percent in December 2021, mainly as a result of the step-up in broad-based increases in processed food prices.


The evolution of this component continued to reflect the surge in agri-food commodity prices and energy and transport costs, alongside the influences of persistent bottlenecks in production and supply chains.


They were compounded by increasingly higher short-term inflation expectations, the resilience of demand in certain segments, as well as by the significant share of food items and imported goods in the CPI basket. Economic activity continued to weaken more than expected in 2021 Q4, falling by 0.1 percent versus the previous quarter, but solely on the back of the marked deterioration in the performance of agriculture.


Developments made it likely for excess aggregate demand to remain low during this period, in line with earlier forecasts, given inter alia the implications of the revision of statistical data on economic growth in 2020 and 2021.


At the same time, annual GDP dynamics saw in 2021 Q4 a markedly stronger-than-anticipated decline, i.e. to 2.4 percent from 6.9 percent in Q3, but almost entirely on the back of the contribution of the change in inventories falling to a negative value.


(Please find full report on: ///home/cristiana/Desc%C4%83rc%C4%83ri/Summary%20IR%20May%202022.pdf)