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2024/01/31 / Erste Group Research

Romania Special | Inflation drivers: GDP deflator approach

Unit profits were exceptionally high in 2022, as the energy shock triggered a spike in inflation, which resulted in higher markups for firms. In 2023, the profit contributions to the GDP deflator were much lower. The labor cost contribution to the formation of the GDP deflator was much lower compared to profit in 2022, but was on the rise in 2023, as wages adjusted with a lag to inflation, while productivity struggled to keep up.Deconstructing the consumption deflator, a better proxy for consumer prices, we arrive at the same conclusions, but we can also argue that the import price influence was particularly high in 2022 and 2023.

Real wage growth, which is expected to increase, on falling inflation and a minimum pay rise, unmatched by productivity gains, is likely to keep underlying inflationary pressures alive. Profit margins are already under pressure and offer little headroom to absorb higher labor costs. Hence, the NBR is likely to start cutting rates in May and deliver incremental steps of 25bp each, reaching 5.75% by year-end vs 7.00% currently; tightening liquidity management is an option if disinflation stalls. With the import price contribution to domestic price pressures on the rise, the NBR is likely to keep a lid on RON weakening pressures. Hence, RON nominal depreciation is likely to be limited to well within the inflation differential.

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General information

AuthorErste Group Research
Product nameCEE Economies Special Report
Topic in focusFX, Macro/ Fixed income
Economy in focusCEE, Romania
Currency in focusRomanian Leu
Sector in focus-


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