NBR Inflation Report – second take

I watched the press conference today, on TV, and I must say that was a very impressive act of magic. The main idea, fed to the press, was the updated forecast for inflation (previous post shows how reliable that is).  In the same time, here and there you could here phrases like, we are not celebrating yet, there are all sorts of risks, we still are in a wait and see mode, it can go either way especially if… etc. There was a hint of concern in the Governor’s speech that can almost be mistaken for tiredness.

This is what  I came up with after reading the report one time.

1) This will always remain a puzzle for me but if NBR is really concerned about inflation why does not act to bring CORE2 below the mid-point of the target? The story sold to the press was all about the CPI inflation and as the governor put it the better outcome is expected as the result of some positive shocks from the volatile part of the CPI (e.g. food prices). But then the governor explains that monetary policy cannot directly influence those prices hence (my view here) cannot have anything to do with the expected drop in inflation. But monetary policy does directly influence CORE2, as per the same source.  Great, so what do we expect from this measure? Surprise, the part that NBR can control is expected to increase in the same horizon as CPI inflation is expected to drop.

The way I see it this does not make sense. If you are serious about inflation then you should show a decreasing curve for CORE2 and then any positive shock from the volatile part of CPI should be a bonus. I hope that we are not afraid at NBR that we might drive inflation too low.

2) The report shows that the NBR is very good at identifying the risks around the inflation forecasts. This is the case for all the reports. They identify correctly the macro risks, the channels thorough which they might hit the economy and sometimes even the effect. What the NBR does not do very well, the inflation track record shows it, is to assign the correct probabilities to these scenarios. In fact, if we take the forecasts and revisions one can see that NBR is always attaching more probability to the positive shocks than to negative ones. However, this strategy did not work very well in the last 4 years.

3) One point where I agree with NBR concerns the drivers of economic growth. The report shows that main driver of current pick up, albeit small, in growth is due entirely to external demand. In fact the long term drivers of economic growth, final consumption and gross fixed capital formation, show a deterioration to the previous period. This is not good. Especially as the recent EU and US data shows slowdown in those economies. As I said on a previous post, this recession* will find us again unprepared.

*Yes, I think is time to call again a recession especially in developed markets. I will go ahead and say that for Romania it looks very likely that this year will finish again with negative growth. I will devote an entire post to this in the following days.

4) The labor market is a big black hole in Romania. We know that people are poor, we know that there is unemployment, we feel it in depressed demand and yet the official figures show improvement in unemployment figures. Along these lines the Inflation Report shows unit labor costs increasing.  While this is not good for inflation it does not reconcile the figures for  consumption and the general feeling in the economy.

5) Total credit growth remains negative. At the component level there is small pick up in credit denominated in foreign currencies. I guess no one ever learns. But the bigger story is that it is hard to see growth with this low credit numbers.  Here everyone blames everyone, bankers that there is no demand and borrowers that conditions are draconian, but at the end of the day without credit this economy will not grow.


Tentative conclusion: I am impressed with the magic act from the NBR, burying the bad news , i.e. under performance of the economy, under a nice blanket of good news, i.e. better forecast for inflation. If we were to take bets I would say that negative growth this year has a better chance than inflation being on target.




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