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Monday, May 12, 2008

Romania Inflation April 2008

Romania's inflation rate remained at a two-year high in April as wage increases and a lending boom spurred consumption and a weaker leu increased many services prices. Inflation was an annual 8.6 percent last month, the same as in March, the National Statistics Institute INSSE said today. Consumer prices rose 0.5 percent on the month, down from a 0.7 percent month on month increase in March.




A drought that destroyed a third of Romania's crops last year continued to pressure food prices in April while rising lending and wages prompted Romanians to shop more. The leu's decline against the euro also raised prices of services such as rent and mobile phone bills that are measured in euros. The leu has weakened 11 percent against the euro in the past year.


In March, net wages rose an annual 17.7 percent and household debt rose an annual 66 percent.






Perhaps even more importantly Romanian producer prices continue to accelerate, and the annual rate reached 15.6% in March, which means there is plenty of evidence of "second round" effects now building up in the pipeline.



Mugur Isarescu, governor of the Banca Nationala a Romaniei, has predicted that inflation will end the year at an annual 6 percent, above the bank's inflation target of between 3 percent and 5 percent. The bank also missed its 2007 inflation target of between 4 percent and 6 percent as consumer prices increased by 6.6 percent in 2007.

The central bank raised its Monetary Policy Rate a quarter of a percentage point to 9.75 percent on May 6 to fight inflation. It has raised the rate at every policy meeting since October, when it was 7 percent. The board next meets on June 26.



It's a little bit early to be drawing any strong conclusions here, but retail sales did slow noticeably in March - rising at an annual rate of 11.2%, down from February's 23.5% - and if we look at the chart below we could get the impression that the "great wave" may now be over. What we will now be likely to see - if what has happened in the Baltics is anything to go by - if a steady slowing in the economy, even as inflation continues to push upwards. By the look of it there may be a six to eight month lag (or slightly more) before movements in the producer price index hit the CPI.

2 comments:

Mario said...

Interesting comments. Will you regard the house debt shift towards the Euro, as a good or bad thing? Surely the Euro acts as a brake/safe-heaven and makes the prediction as a whole, more challenging.

Edward Hugh said...

Hello Mario,

"Will you regard the house debt shift towards the Euro, as a good or bad thing?"

Well this depends on whether you can manage a safe landing with the euro before you get a severe downward correction in the leu. So it is a race to the finish post. Personally I wouldn't want my future to depend on anything so delicate, since there are so many uncertainties along the way.

And, of course, a big one of these is inflation. If labour shortages produce more wage inflation than the competitivity of your exports can hold, then really there is no way out other than devaluation.

At the present time the central bank has an easy job in raising rates, since this is generally popular and pro-leu. The problem will come if ever the bank - as in Hungary right now - needs to lower rates to help a stagnant domestic economy, but can't because of the household distress that this would cause if a lot of money went out following the drop in yield, and the pressure on the leu was strongly downwards.

Surely the Euro acts as a brake/safe-heaven

Well it certainly can do this up to a point, but remember the eurosystem can't bail everyone out at once or the system itself will burst, and over the next few years the ECB will have its work cut out I think (for different reasons) with Spain, Ireland and Italy.

My feeling is here that too many people are queueing up hoping the ECB will be the lender of last resort, and that the system was never designed to hold so much stress.

I just read this quote from Standard and Poor's chief analyst for Lithuania Eileen Zhang, and as you can see there are a lot of people out there starting to look desperately towards Frankfurt.


Zhang ruled out the possibility of a currency devaluation, saying that in a crisis scenario Lithuania would more likely adopt the euro unilaterally without the permission of the European Central Bank and the EU. ``This would come when a crisis in a country would be very severe,'' Zhang said. ``But the likelihood is very, very low at the moment.''

The problem is I think the likelihood of a very very severe crisis in the Baltics is growing by the day (see my Baltic economy blog).