Romania Faces Persistent Inflation Amid Economic Slowdown

The disconnection between a cooling economy and high inflation defines Romania's current macroeconomic situation. While the country continues to converge in income and price levels with the euro area, this process has been disrupted by various shocks to energy prices, tax increases, and administered prices, which have all impacted wages and service prices.

Despite headlines showing a fall in annual consumer price inflation from 10.4% in June to 6.2% in August, this drop does not fully reflect underlying improvements, with a rise to 6.6% noted in September. Much of this change can be attributed to base effects, particularly as previous steep price increases for electricity, VAT, and excise duties have begun to fall out of annual comparisons. The adjusted CORE2 index from the NBR, which excludes more volatile components, still indicates high core inflation at 6.2% in September, emphasizing the need for caution in interpreting these figures.

Romania's inflation has been complicated by overlapping economic shocks. The pandemic led to significant supply constraints, which were soon followed by the 2022 energy crisis. Energy price controls initially mitigated the damage to households, but their removal set the stage for further price adjustments. Geopolitical tensions and climate factors have contributed to rising fuel and electricity costs, prompting the NBR to revise its inflation forecast for 2026 to 6.1%.

Inflation in Romania is particularly sensitive due to the proportion of household spending on food and energy. Households notice price changes in these categories often, leading to a fixation on recent inflation data rather than the central bank’s targets. Service inflation reached 11.1% in September, illustrating further domestic pressures as service-related costs have become increasingly disconnected from external market fluctuations.

Wage dynamics play a crucial role in this inflation landscape. While nominal wages grew rapidly due to minimum wage increases and public sector pay hikes, real wage growth has recently fallen below inflation rates, resulting in a contraction in purchasing power. Current macroeconomic conditions have resulted in a lagged response, as businesses adjust prices based on past increases, further embedding inflationary expectations.

As domestic supply struggles to keep pace with demand, imports have served as a necessary outlet, particularly affecting Romania's current account deficit, which reached 8.2% of GDP in 2024. While imports have helped temper inflation pressures, this has led to imbalances and greater sensitivity to international commodity price movements.

Policy responses have also shifted. Romania's fiscal deficit expanded to approximately 9.3% of GDP in 2024, driven by increased public spending. Subsequent fiscal tightening has reduced the deficit but has also exerted downward pressure on consumption.

At the same time, the NBR has kept interest rates at 6.50% to manage expectations, despite inflation significantly exceeding its target of 2.5%. Current policy positions highlight the central bank's reliance on fiscal restraint and weak consumer demand to curb inflation without necessitating aggressive rate increases.

The exchange rate management further complicates these dynamics. While a stable leu helps prevent immediate import-driven inflation, it has led to real appreciation and heightened external vulnerabilities as domestic costs have risen faster than those of trading partners.

In summary, the sustainable solution to Romania's inflation challenge lies in enhancing productive capacity through improved infrastructure, labor participation, and skill development. External factors such as EU funding support could facilitate this transition. However, Romania's economic future hinges on shifting from consumption-driven growth to enhancing productivity, allowing inflation to decrease more reliably over time.