Romanian inflation dropped in February to 2.6% relative to the same month of 2011. This is good, as at least the prices measured by CPI seem to fall. But will this last? (Updated my conclusions to incorporate the decision to increase public wages by 15% starting June this year)
Below it the inflation evolution as measured by the CPI. Very volatile but one can argue that there is a downward trend.
But this is just one part of the story. If we look at the GDP deflator (9.2% increase in 2011), which measures general prices in the economy, we see a different picture. From this graph we infer that the level of the economy prices are on an upward trend and much higher than the CPI prices. I attribute this to inefficiencies in the production process that are transferred into selling prices, energy prices and oil prices.
Where do we go from here? In other words will the GDP deflator fall towards the CPI inflation or the CPI Inflation will rise to the GDP deflator level. For 2012
I see more chances for the former, i.e. a drop in GDP deflator ,as the government has just decided to increase public salaries by 15% starting with June, I expect CPI inflation to drift higher towards the GDP deflator values. The reason is that I still see the economy slowing down aggressively this year and unlike in 2009 this slowdown will not be seen in the overall prices in the economy as measured by the deflator. In the same time any artificial propping up of the demand via government expenditures will tilt the balance to the second scenario where CPI inflation will rise towards the GDP deflator. One more reason not to increase government spending in 2012.