Negative surprise from inflation in September

Monthly inflation rate came in at 1.2% mom in September, substantially above our expectations (0.6% mom) and market consensus (+0.5% mom). In September, the annual inflation rate jumped to 5.3% yoy from 3.9% yoy in August. 

In September, inflation was driven mainly by food prices (+2.3% mom), following adverse weather conditions this year. While volatile prices for fruits, vegetables and eggs (+8% mom) advanced the fastest, prices for processed/transformed foods also increased. As a result, growth in CORE 3* measure of underlying inflationary pressures accelerated to 3% yoy in September from 2.6% yoy in August. Food prices have a large impact on the headline inflation rate given their large share in CPI basket (37.2%). 

Dynamics of fuel prices (+1.6% mom) and of some administered prices (+2.8% mom for natural gas tariffs and +2.2% for water, sewerage, and sanitation services) also pushed inflation rate higher in September. 

While we have expected the annual inflation rate to be at 4.5% yoy at the end of this year, the big negative surprise in September and large chances to see food prices climbing further faster than expected in the coming months suggest that annual inflation rate would rather end the year close to 5.5% yoy. Moreover, it could slightly outpace this level in the first half of 2013. 

While the NBR still might be reluctant to raise the key interest rate given that inflation rate is mainly driven by supply side shocks outside of its control, we think that it would tighten the control over liquidity conditions in the money market (especially given also the pressures for leu depreciation). Accordingly, interbank interest rates and yields for government bonds are likely to increase in the coming period even if the key rate is maintained unchanged. We think that NBR would start hiking the key interest rate only if second-round effects of supply side shocks would materialize and inflationary expectations would increase significantly. 

*CORE 3 = total CPI excluding administered prices, volatile prices (fuels, fruits, vegetables and eggs) and alcohol and tobacco 

Note: Shaded area denotes the +/-1 pp. band around the mid-point inflation target 

Source: National Institute of Statistics, Raiffeisen RESEARCH 

Source: Raiffeisen. RESEARCH ROMANIA