Monday, October 11, 2010

Romanian September Inflation Rate Increased More Than Expected to 7.8%

The Romanian inflation rate in September rose more than economists expected to the fastest pace in more than two years as food and services prices increased after the government raised the value-added tax .

The rate rose to 7.8 percent, the highest since August 2008, from 7.6 percent in August, the Bucharest-based National Statistics Institute said in an e-mail today. The median estimate of seven economists in a Bloomberg survey was for a 7.6 percent rate. On the month, prices advanced 0.6 percent.

Romania, which turned to the International Monetary Fund and the European Union for a 20 billion-euro ($28 billion) bailout during the worst recession in 20 years, raised the VAT by 5 points from July to 24 percent to meet an IMF-agreed budget deficit target of 6.8 percent of gross domestic product this year and 4.4 percent in 2011.

The central bank forecasts inflation will end the year at 7.8 percent, before slowing to 3.1 percent in 2011 as the one- time impact of the VAT increase dissipates, Governor Mugur Isarescu said on Aug. 6.

“We expect year-end inflation to be slightly below 8 percent on the grounds that the presence of the significant economic slack should contain the possible second-round effects of the VAT hike,” Citigroup Inc. economists Ilker Domac and Gultekin Isiklar wrote in a note today before the inflation report. “A weaker-than-expected leu would complicate inflation dynamics, given the close link between inflation expectations and the exchange rate” and ’’a reversal in food prices, which have remained favourable so far, could make the central bank’s job more difficult.’’

Food price inflation accelerated an annual 4.8 percent in September compared with a gain of 3.8 percent in August, the institute said. Prices for services rose an annual 6.4 percent last month from 6.2 percent in August and non-food prices gained 10.7 percent from 11.25 percent the previous month, according to the institute.

To contact the reporter on this story: Irina Savu in Bucharest at isavu@bloomberg.net.

To contact the editor responsible for this story: James M. Gomez in Prague atjagomez@bloomberg.net

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