Inflation feeds on bread and beans

The inflation rate rocketed to 4.3 percent in July, leaving far behind not only the Government’s expectations, but also the estimates of independent analysts. It ended up reaching 24 percent on the first seven months of the year, turning the 30 percent threshold pledged for the entire year into a mere dream.

The announcement immediately impacted on the foreign currency market, where the dollar, which usually climbs 30-40 lei, gained over 70 lei, to 22,233 lei, dealers and bankers estimating that a more powerful depreciation of the domestic currency is impossible to parry. At the same time, a rise in interests is also forecast, if inflation should get higher.

“Over the last months, utilities tariffs have increased, and bad luck with the drought came on top of all this. We are hoping to make up for lost ground during the following months,” said the Government’s spokesperson, Gabriela Vranceanu-Firea.

The July increase in inflation was mainly triggered by the ascension of prices for food products, which posted an overall 5.2% increase. The price for non-food products gained 3.9 percent, while services tariffs climbed only 3.1 percent. Household gas became 22 percent more expensive in July and electric energy went up 14.5 percent.

Within the foodstuff category, the highest price increase was posted by bread and flour, (10%, respectively 15%), while beans, eggs and sugar became 20% more expensive.

In their turn, RomTelecom tariffs have increased, since July 1st, by 11.6 percent. Railway tickets’ price went up 8.5%, while the price of bus tickets increased by 5 percent.

“This inflation rate is huge, it is much higher than it normally should be during the summer months. However, I believe that the foodstuff price increase caused by the drought disregarded reality, given that a food crisis is totally out of the question,” Lucian Albu, director of the Prognosis Institute within the Romanian Academy said. He believes that there are still chances for the inflation rate to be confined bellow a 35% level.

Premier Isarescu recently stated that the new inflation target for the current year was 32%.

“The inflation rate reached so far does not surprise me,” BRD SocGen president Bogdan Baltazar said. “When drafting our budget of revenues and expenditures, we took into account an inflation rate of 35-40%. At the moment, interest rates are very low, so that the population’s interest might shift from deposits to dollar savings, which might impose a great deal of pressure over the exchange rate,” Baltazar said.

Andrew Kennigham, an economist with the London-based subsidiary of Merril Lynch, does not believe that the inflation rate registered in July will hinder future negotiations between the Government and the International Monetary Fund in August.

“I do not think that authorities should mind the July inflation rate too much during negotiations,” he stated. Albu sees as main causes for the high level of inflation the delays in the state sector’s restructuring process, as well as the Government’s weakness in front of trade unions.

“As an economist and citizen, I am puzzled by this level of inflation. All neighbouring countries have been able to cut it, we are the only ones to indulge in this situation. If we go on like this, there’s no way the inflation rate is going to drop to 6% in 2004,” Albu concluded.