Isarescu: Vice tax could rekindle inflation

The introduction of the vice tax could create inflationary pressures, considering the significant share cigarettes have in the basket used to calculate consumption prices, the National Bank of Romania Governor Mugur Isarescu yesterday said.

“Seeing how much cigarettes account for, nearly half of the share of bread, jokingly speaking, you get the feeling that people in Romania eat cigarettes,” the NBR Governor added.

In the consumption basket used by the National Statistics Institute, cigarettes account for 4%, while bread accounts for nearly 8%.

Isarescu added that the favourable price trend in February and March was no guarantee for the continuation of the disinflation at the desired pace, because potential shocks still existed, especially on the part of the supply.

In the opinion of the NBR Governor, the inflationary rate over the last two months, 0.2%, indicates an annual inflation base of a little more than 2%, a thing it is hard to do something about.

In that case, the inflationary outbursts on the controlled prices market are hard to counteract by restraining demand.

NBR announced an inflationary target of 5% plus minus one percentage point for this year, given an annual rate of 8.6% in 2005, slightly higher than the variation interval set for last year.

Three months into 2006, the annualised inflationary rate has fallen to 8.4%, backed by very good figures for February and March, when prices rose by a little more than 0.2%.

The vice tax is part of the set of laws on the health care system reform, enacted by the Parliament after the Government assumed responsibility for it and which is awaiting promulgation.

The tax was set to 10 euros / 1,000 cigarettes, that is 20 eurocents per each pack. The amount might make its way into the final price of the cigarettes almost in full.

The Public Finance Ministry is leaning towards introducing the vice tax in the excise duty levied on these products. The decision is up to the Government.