CPI inflation is falling but almost all other prices are rising(update)

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.

10 thoughts on “CPI inflation is falling but almost all other prices are rising(update)

  1. Florin, had you ever had the chance to see if there are any corelations between CPI and the deflator as a leading indicator?

    I think the bigest surprise of the near future will be the CPI (if it is not massaged more then it alreay is).

    15% increase in government salaries with 2% budget deficit as main constraint while not increasing taxes and having low economic growth makes me think that the only way this will be achived is through NBR suported inflation. Mr Croitoru of NBR is already preaching of solving the “liquidty” problem with the printing press. Do you belive in conicidences?

  2. The downward trend in CPI should also be analyzed in the light of adjustmens to the calculation basis. The percentage of certain goods, (food and cigarettes) has gone down, lowering headline inflation.
    On the other hand CPI does not include industrial prices, which have different dinamics than those for the general consumer. Households are captive consumer when it comes to comodities, therefore prices are regulated. Such regulations do not always apply to companies, hence higher price volatility and a higher GDP deflator.

    If food related expenditure continues to decrease as a percentage of household consumption (doubt it in the short run) and comodities have an upward trend, then yes, CPI will go up, but not by as much as the GDP deflator.

    1. @DDr
      I am not saying it will get up there to 9% but my fear is that we will see inflation above 5% in the next 12 mths.
      BTW the basis effect is true for the GDP deflator also.

  3. There is no reason why the prices from GDP deflator will not influence in the end the CPI inflation prices. So I support your view that CPI will tend to go upward.

    The high GDP deflator and CPI inflation in an low Ron interest rate environment will bring into discussion the normality of real negative interest rate which act as a new tax on former consumers net incomes. Is the net income a true revenue of the consumer or it is the NBR constitutional right to use it for financing freely the economy and the government deficit ?

    Does Ron have a true function of store of value ? What do you think NBR will answer to this question ?

    1. @trend
      The only purpose of RON is to be used in transactions with the government. It is funny to see contracts signed with the government negotiated in EUR, stipulating a EUR amount but settled in RON at some value that it using the NBR fixing as a basis.

      1. Several years ago Mr. Isarescu took an official stance recommending people to bet on Ron.

        Such suggestion looked like a financial trap. Those who bet on Ron are forced now to never enjoy the postponed consumption and to freely finance the budget deficit.

        Could be this monetary policy a proper one ? How one could estimate the losing wealth effect of this monetary policy ? I am interested because no one is mentioning it in any economic analyisis.

      2. @Trend
        I am working on a monetary history of Romania. My first focus is to identify the role of monetary policy during the recent recession.
        Then I would look back at the period 2000-2008, and finally 1990-2000.

  4. Wonderful!

    We all will be surprised about what peculiar decisions had been made on monetary policies. Moreover I hope such a review of monetary policies will provide an idea about the group who received main help .

    If I may be of any help please let me know.

    1. @Trend
      The best help I can always get is honest and objective criticism. Soon I will publish the first two studies on the 2008 -2011.
      I do this on my spare time so it does take a little longer than if it were my job🙂.
      thanks for the support

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