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Cronicile

Inflation exceeds 4% threshold. Solution – Correlation between income growth and economic performance

de Marin Pana , 15.4.2019

Consumer prices for the population increased by 0.49% in March 2019, which is significantly below the previous months but higher than in the same month of the previous year (+ 0.29%).

Annual inflation climbed to the threshold of four percentage points, namely the upper limit of the BNR’s forecast for the first quarter of the year. To be noted, though, the increase of prices that are under the influence of the monetary policy was 0.27% below the previous month.

As an annual average (March 2018 – February 2019, compared to the previous 12 months), inflation slightly decreased to 4.4% below the 4.63% level recorded at the end of last year. INS also communicated the average value of IAPC consumer prices harmonized index at 4.1%, with the important observation that the temporary value went up to 4.2%.

*

  • Inflation evolution in the last 12 months
  • Month  Apr      May     June    July     Aug      Sep      Oct      Nov     Dec     Jan      Feb      Mar
  • Inflation
  • Adjusted CORE 2
  • Annual inflation

*

Major influences on increasing prices in March came from fuels (following developments on international markets), vegetables and canned vegetables (+ 2.84%, with the potato being again the main player at +4.41 % and + 26.33% since the beginning of the year!) and on the tobacco and cigarettes segment (+ 1.55%, after the increase in excises).

Here are the product categories in the consumer basket that generated four-sevenths of March 2018 inflation:

*

  • Positions from consumer basket with a maximum impact on the monthly increase in inflation in March 2019
  • Products          share of basket           price increase             effect on CPI
  • Fuels
  • Tobacco, cigarettes
  • Vegetables and canned vegetables
  • Total

*

It should also be noted that the effect of fruits and canned fruits on the CPI was limited to only 0.02%, after the increase of 4.50% in citrus and other fruits from southern regions was partially counterbalanced by the decrease of 2.10% recorded in fresh fruits.

The third component of the trio of volatile prices, besides vegetables and fruits, eggs, recorded a five-percentage points price decrease, whereupon a -0.03% impact on the CPI.

Beyond a quite adverse conjuncture effect on volatile prices, linked to the international conjuncture or the local tax evolution, a diffuse increase in various food products, such as bread (+ 0.45%), sugar (+0.58%) and milk (+ 0.22%), or non-food such as medicines (+0.41%), furniture (+ 0.27%) or clothing (+ 0.21%) should be noted.

In the wait of the reversal of volatile prices and fuel-related influences, the monetary policy remained stable and the indicator placed under its influence, CORE 2 adjusted, declined to a reasonable level, similar to the level in September 2018, before the inflation returned within the target corridor.

*

  • Positions from consumer basket with a maximum impact on the monthly increase in inflation in March 2019
  • Products          share of basket           price increase             effect on CPI
  • Fuels
  • Tobacco, cigarettes
  • Vegetables and canned vegetables
  • Total

*

Even if we add the half-percentage point that appeared additionally to the central bank’s forecast for February 2019, for the coming quarters, we would witness an inflation decrease in Q2 to the target corridor of 2.5% plus/minus 1%, helped by the base effect in April and May.

The real challenge will be to limit the return to the upper half of the target range in Q4 2018 and Q1 2020.

  • *
  • Forecast of annual inflation and IPC prices and related uncertainty interval
  • Quarter
  • Inflation
  • Uncertainty interval

*

But beware, a number of negative influences have already occurred. More than two-thirds (2.13%) of the price increase space forecasted for the whole year (3%) has already been exhausted after only three months in 2019.

Which would require a drastic limitation in the income increase policy and a much better correlation with the real economic performance.

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