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Monday, October 18, 2004

Inflation going up due to petrol price increase

About one week ago I meant to write a post as I was very confused by how the prices for various products in Romania can go up so fast due to petroleum price increase. Basicallz, the petroleum price increased by 10%, while the price for meat and other day-to-day products increased bz more than 15%. As I imagine the transport has a little impact in the general price for meat, for example, it is hard for me to understand this argument.

But I hope the article bellow, courtesy of Ziarul Financiar, will put more light into this problem.

To be continued in a following issue....

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The skyrocketing petroleum price is raising questions as to whether the inflation curbing pace planned will be possible to attain in 2005, right at a time when Romania is about to push the December to December rate below 10%, after 14 years of failures in this regard.

The Government has recently adjusted the inflationary forecast for next year upwards from 6% to 7%. The economic memorandum agreed upon with the IMF at the end of September, included a 6% inflationary target for late December 2005, with quarterly decline targets estimated at 8.1%, 8%, 6.5% and 6%. What is the official explanation for the change of forecast?

"We have a prudent 2005 inflationary target because there are potential growth risks, one of which is the international petroleum price if it maintains high," stated Finance Minister Mihai Tanasescu yesterday.

Under the circumstances, the State will also find itself deprived of its "reference fuel price" lever next year, which it used to pull in the past but ceased to work now that the main company on the market, Petrom was privatised.

Even if no significant price changes are made around the time of elections, there is no way they will be possible to avoid early in 2005, given that the new shareholder, OMV, cannot afford to operate at a loss.

Contrary to the initial expectations, the rise in the petroleum price turns out to be a lasting phenomenon, whose shocks will not be possible to dampen in spite of Petrom's domestic production of petroleum. Furthermore, a fast-growing economy like that of Romania will keep increasing consumption.

None of the major producers sees any significant price cuts being operated, as the crisis is made worse by the concurrent political instability in Iraq, Nigeria and Venezuela.

How can this effect be alleviated, which has already been delayed for as long as possible by not operating significant increases of Petrom's' prices?

At first, a temporary excise cut may seem to be the solution, but such an issue cannot be raised before Brussels, which expects to see excises rally to the levels in the EU on schedule.

If a new period of increased inflationary pressures looms ahead, how will NBR be able to continue reducing the benchmark interest?

At the same time, how can the expectations of the market about the inflationary trend be kept in check, considering it already sees prices increasing in a chain reaction as imminent?

The difficulty of proceeding with the disinflation once the 10% threshold was about to be reached was anticipated. The unexpected skyrocketing of the petroleum price, however, might turn out hard to overcome, particularly because it overlaps an inflation with a major structural component that is hard to tame as it is.

Inflationary rises were registered in countries like Hungary and Poland in those times when they were moving from the two-digit to one-digit inflationary rates. The Hungarian inflation therefore increased to 11.2% after having dropped to 10.3%. Poland's similarly resumed growth to 9.8% from 8.6%.

Posted by Mihai : 10/18/2004 10:41:00 pm