Data published recently by the National Institute of Statistics (INS) show a decline in consumer prices in December, by 0.54% y/y. This was driven mainly by the cut in the standard VAT rate (from 24% to 20% effective January 1, 2016) and by lower energy prices.

Non‑food goods (44.25% of the consumer basket) were down 0.87% y/y, while service prices (19.75% of the basket) fell 1.83% y/y in the last month of 2016.

By contrast, food prices (36% of the basket) rose 0.68% y/y in December, as the impact of the VAT cut on food and catering (from 24% to 9% effective June 1, 2015) faded.

As a result, in 2016 consumer prices recorded an average annual decline of 1.55%. This performance was driven by VAT rate cuts and lower energy prices, and was influenced by international crude oil prices (Brent down by around 17% y/y) and by exchange‑rate fluctuations.

As for the Harmonised Index of Consumer Prices (HICP), it fell by 0.1% y/y in December and by 1.1% y/y in 2016.

We note that in recent months there have been signs of a turning point in consumer‑price dynamics: the fading impact of VAT cuts, rising international oil prices and depreciation of the leu.

In BT’s baseline macro scenario, we expect annual consumer price inflation to return to positive territory and converge towards the NBR’s target. Thus, average annual inflation could accelerate from 1.8% in 2017 to 2.5% in 2018 and 2.6% in 2019.