BCR: Inflation surprisingly low in August

This pushed inflation down further to a 17-month low in August (4.3% y/y). The price of food products remained on a downtrend in August (-1.4% m/m), helped by a plentiful crop of vegetables and fruit, but this was not much of a surprise and most analysts seemed to have factored in the positive impact coming from agriculture. The price of non-food products instead was astonishingly low (0.02% m/m), considering the significant rise in thermal energy prices announced by several local administrations, including Bucharest, as the cabinet is phasing out heating subsidies for the population, as part of the fiscal consolidation program. On the other hand, services continued to remain off the chart in August, marking up prices by more than 0.8% m/m. The main culprits behind this were 'water and sewerage' (3.8% m/m), urban transportation fees (1.3% m/m) and inter-urban tariffs (railway transportation was hiked 18% as of August) and a depreciation of the leu vs. the euro, which drove phone bills up by 0.3%.

In our baseline scenario, we see inflation at 4.6% as of end-2011 and, although the local environment seemed to have loosened its grip on inflation, there are still upside risks for CPI in the remainder of this year. It is worth noting that disinflation so far has been almost entirely supported by the declining price of vegetables and fruit, which combined hold a big 6% in the consumer basket. Once the positive impact of the seasonal crop in agriculture wears off, inflation is likely to bounce back to slightly higher levels y/y. Inflation is more likely to fall within the central banks' target range (3%±1pp) in 1H12. We see the central bank keeping the interest rate flat for the rest of 2011.

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