Inflation Report - August 2025

Summary   Developments in inflation and its determinants   The annual CPI inflation rate went up to 5.66 percent in June, from 4.86 percent in March, exceeding by 0.6 percentage points the level anticipated in the previous Report. This acceleration was mainly driven by the notable hike in vegetable and fruit prices, amid extreme weather events, while behind the persistently high core inflation stood the pick-up in short-term inflation expectations and the still elevated dynamics of unit labour costs.   Conversely, in Q2, the inflationary contribution of the output gap to the annual adjusted CORE2 inflation rate neared zero. At the same time, energy prices recorded negative quarterly changes, amid the de-escalation of tensions in the natural gas market, the depreciation of the US dollar against the domestic currency and the decline in the Brent oil price April through May.   The average annual CPI inflation rate, calculated based on the national methodology, hovered around 5.1 percent during Q2, while the corresponding indicator measured in accordance with the harmonised index (HICP) shed 0.1 percentage points versus March to 5.3 percent in June 2025.   The harmonised index continued to converge slowly towards the European average, the gap with the latter remaining significant.   The annual adjusted CORE2 inflation rate halted its decline during Q2, climbing from 5.2 percent in March to 5.7 percent in June. This was driven by persistently high wage costs, with an impact particularly on the food industry, also faced with upswings in some commodity prices – meat and milk.   Specifically, the food component had a prevalent contribution to the faster rise in the adjusted CORE2 inflation rate, recording an annual pace of increase of 5.5 percent in June (a year-and-a-half high), i.e. 1 percentage point above the March level.   Non-food items saw a slightly slower annual growth rate, i.e. 5.1 percent in June, down 0.3 percentage points versus March, whereas services accelerated by 0.3 percentage points to 6.6 percent; the levels of the two sub-indices have remained high from a historical perspective, fuelling persistent short- and medium-term inflation expectations.   The depreciation of the leu against the euro generated additional pressures on the prices of some services expressed in foreign currency and of some categories of imported goods.   The annual dynamics of unit labour costs economy-wide declined to 8.4 percent in Q1, after posting double-digit levels for two years. Labour productivity made a notable contribution to this evolution, mainly on account of the drop in employment; the annual change in the compensation per employee saw a decrease to 13.8 percent from 14.7 percent at end-2024. In contrast, the annual growth rate of unit wage costs in industry stepped up to 16 percent in 2025 Q1, from 10.5 percent in 2024 Q4.   The acceleration was driven by the rise in the minimum wage at the beginning of the year, but also by the removal of tax breaks in the food industry, with some companies partially compensating for the negative effect of this measure on the net wage of employees by increasing the gross wage. April through May, the annual dynamics of unit wage costs moderated to 12 percent, owing to a favourable base effect in May 2025.   Monetary policy since the release of the previous Inflation Report   In its meeting of 16 May 2025, the NBR Board decided to keep the monetary policy rate at 6.50 percent per annum. The interest rates on standing facilities were also left unchanged, i.e. the deposit facility rate at 5.50 percent per annum and the lending (Lombard) facility rate at 7.50 percent per annum.   In 2025 Q1, the annual inflation rate had declined less than anticipated, given that the decreases in the dynamics of fuel and tobacco product prices during that period, alongside those in the growth rates of non-food sub-components of core inflation, had been partly counterbalanced, in terms of impact, by the swifter increase in energy prices, administered prices and processed food prices.   In turn, the annual adjusted CORE2 inflation rate had resumed its decrease in 2025 Q1 at a slower-than-expected pace, dropping to 5.2 percent in March from 5.6 percent at end-2024. The disinflationary base effects from non-food sub-components and the slowdown in import price dynamics had had a downward impact, while notable opposite influences had come from the hike in some agri-food commodity prices, as well as from the gradual pass-through of increased wage costs to some consumer prices, also amid the high levels of short-term inflation expectations.   Heightened uncertainties continued to be associated with the future fiscal and income policy stance, given on the one hand the budget execution in the first three months of the year and, on the other hand, the budget consolidation requirement according to the National Medium-Term Fiscal-Structural Plan agreed with the European Commission and to the excessive deficit procedure. High uncertainties and risks also stemmed from the future evolution of energy and food prices, largely correlated with developments in commodity prices, as well as from the trade policy measures taken in the advanced economies, with a potential significant impact on the international prices of some intermediate and final goods.   High uncertainties and risks to the outlook for economic activity, implicitly the medium-term inflation developments, arose from the external environment, given the protracted war in Ukraine and Middle East situation, but especially amid the uncertainty and the potential effects generated by the US trade policy and by the retaliatory measures taken by other countries, affecting the developments in the global economy and in international trade.   Furthermore, the absorption and use of EU funds, especially those under the Next Generation EU programme, were essential for counterbalancing, at least in part, the contractionary effects of budget consolidation and of geopolitical/trade conflicts, as well as for carrying out the necessary structural reforms, energy transition included. The ECB’s and the Fed’s monetary policy decisions, as well as the stance of central banks in the region, also continued to be relevant.   Subsequently, the annual inflation rate had stayed at 4.85 percent in April 2025 (4.86 percent in March), while in May it increased to 5.45 percent. The advance versus the end of 2025 Q1 owed to a further faster rise in food and electricity and natural gas prices, which outweighed considerably, in terms of impact, the new decreases in the dynamics of fuel and tobacco product prices, as well as of the non-food sub-component of core inflation.   Concurrently, the annual adjusted CORE2 inflation rate had seen yet again a halt in its downward trend, going up to 5.4 percent in May, from 5.2 percent in March, given that the influences stemming from disinflationary base effects and the decline in the import price dynamics were more than offset over this period by those coming from the hike in some agri-food commodity prices and the gradual pass-through of high wage costs to some consumer prices, as well as from the pick-up in short-term inflation expectations and the increase in the EUR/RON exchange rate.   In turn, economic activity had stalled in 2025 Q1, after adding 0.5 percent in the previous three months (quarterly change), which had made it likely for the negative output gap to open more visibly over that period compared to expectations.   Annual GDP growth had moderated further in 2025 Q1 to 0.3 percent from 0.5 percent in 2024 Q4. Domestic demand had continued, however, to see a swifter increase in annual terms, mainly on account of the dynamics of gross fixed capital formation, which had surged, making a strong return into positive territory, whereas household consumption had posted a notably slower rise, but remained the main driver of GDP advance.   By contrast, in 2025 Q1 net exports had exerted again a significantly larger contractionary impact, given the further widening of the negative differential between the annual dynamics of exports of goods and services, in terms of volume, and those of imports, amid the latter advancing somewhat more visibly versus the previous quarter. Consequently, the annual growth rate of trade deficit had posted a strong re-acceleration, while the current account deficit had continued to record a?fast year-on-year pace of increase.   At the time of the NBR Board meeting of 8 July 2025, the latest assessments showed that the annual inflation rate would pick up considerably in the following months, under the transitory impact of the expiry of the electricity price capping scheme and the increase in VAT rates and excise duties starting 1 August, thus climbing well above the values indicated by the May 2025 forecast over the short time horizon.   Based on the data and assessments available at that time, as well as in light of the particularly elevated uncertainty, the NBR Board decided in the meeting of 8 July 2025 to keep the monetary policy rate at 6.50 percent per annum. Moreover, it decided to leave unchanged the deposit facility rate at 5.50 percent per annum and the lending (Lombard) facility rate at 7.50 percent per annum. Furthermore, the NBR Board decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.   Inflation outlook   The global economic environment is still surrounded by elevated uncertainty and economic recovery is slow and uneven. Expansion in a number of emerging economies is partly offset by lacklustre growth or even decline in economic activity in some advanced economies.   In the United States, the Federal Reserve retained a cautious stance, keeping the federal funds rate unchanged. This caution reflects expectations of additional inflationary pressures stemming from the gradual pass-through of the effects of the recent tariff hikes by the US administration. In the euro area, the newly released economic sentiment indicator and confidence indicators for companies and consumers point to a protracted stagnation in economic activity, caused by ongoing weakness of manufacturing and the expected slowdown in exports to emerging markets.   The European Central Bank has continued its rate-cutting policy in the period since the previous Inflation Report, following the convincing recent signs of easing inflationary pressures. However, services inflation is still high, although a future moderation in labour cost dynamics is foreseeable. At global level, disinflation is delayed by adverse shocks: the reshaping of trade flows in response to protectionist measures, energy price volatility, but?also the impact of climate factors on agricultural supply. The outlook shows a slow decline in the annual inflation rate, while risks are further mostly on the upside, in particular those associated with food and energy price developments, two categories of goods highly sensitive to shocks and with a great cross-border impact.   In the present baseline scenario, the annual CPI inflation rate is projected to rise in 2025 Q3, reaching 9.2 percent in September, and thereafter to fall slightly to 8.8 percent in December. The disinflationary path is expected to resume as of 2025 Q4, but inflation will stay high until the summer of 2026. This persistence owes to? the?major supply-side shocks in 2025 H2 being included in the calculation of the annual rate for as long as 12 months.   The CPI inflation forecast for end-2025 was revised upwards by 4.2 percentage points compared to the previous round. The?revision mainly reflects three sources of inflationary pressure: the large increase in electricity prices after the electricity market liberalisation – with an additional contribution of 1.5 percentage points –, the higher VAT rates – with a contribution estimated at 1.6 percentage points –, and the hike in excise duties – with an impact of 0.4 percentage points.   There are also additional contributions of 0.4 percentage points each from core inflation and the price dynamics of volatile components, fruit?and vegetables in particular. For December 2026 and March 2027, the horizon of the previous forecast, the annual CPI inflation rate is projected to be lower, by approximately 0.4 percentage points for each point in time, reflecting disinflationary influences of fiscal consolidation and the gradual adjustment of inflation expectations.   The annual adjusted CORE2 inflation rate climbed to 5.7 percent in June 2025 from 5.2 percent in March. Over the short term, the indicator is anticipated to peak in 2025 Q3, as a direct effect of the hike in indirect taxes. Subsequently, it is seen dropping gradually starting in 2026 Q3, as the direct inflationary effect of fiscal shocks fades away, domestic demand continues to cool down and import price pressures abate.   In the baseline scenario, the annual adjusted CORE2 inflation rate is projected at 7.1 percent in September 2025, 6.8 percent in December 2025, 2.7 percent in December 2026 and 2 percent in June 2027. The medium-term correction is primarily driven by the contractionary effects of fiscal consolidation, reflected in the significant widening of the output gap in negative territory.   The values of the annual core inflation rate forecasted for December 2026 and March 2027 are notably lower than in the previous Inflation Report, by 0.5 and 0.6 percentage points respectively.   Romania’s growth forecast for 2025 and 2026 is heavily influenced by fiscal consolidation effects. The already adopted measures will dampen domestic demand significantly, leading to a visible slowdown in economic activity, with further corrections anticipated from the beginning of 2026, when additional, far-reaching measures in the recently adopted package are due to take effect.   Following the economy’s standstill in 2025 Q1 and its modest recovery anticipated for Q2, as suggested by sectoral developments, a stronger worsening of its path is expected for Q3. The subdued growth dynamics are mostly attributed to fiscal consolidation, while influences from external demand and real monetary conditions are seen to play a secondary part at the current juncture.   Private consumption, the main driver of economic growth in 2024, is forecasted to lose considerable momentum amid households’ weaker purchasing power. Measures such as freezing wages in the public sector and pensions, raising electricity prices and increasing indirect taxes will contribute to slower growth in real disposable income, which may even decline during 2026.   Against this backdrop, gross fixed capital formation is expected to become the main driver of domestic demand growth. However, investment dynamics could be more moderate than previously estimated, especially in 2026, amid the planned cut in public capital expenditure and slower EU funds absorption. Greater risks are associated with Next Generation EU programme, as the eligibility deadline, i.e. August 2026, approaches, which largely reduces the timeframe for mobilising significant private investments into projects.   Given the slow-paced recovery of external demand and decelerating import growth as a result of fiscal consolidation measures, the contribution of net exports to economic growth will probably remain negative during 2025, yet markedly smaller than in 2024. Over the medium term, the further slowdown in domestic demand will lead to subdued import dynamics, running significantly below the historical average. This will be the main channel for correcting the current account deficit in the short and medium term. Under the circumstances, the contribution of net exports to GDP could turn positive again in 2026, supported inter alia by a more visible recovery of external demand. Nonetheless, in the absence of complementary structural reforms, pressures on the external position could swiftly mount again, due either to a rebound in domestic demand or to negative external shocks that are difficult to foresee and counteract.   The NBR’s recent monetary policy stance aimed to bring the annual inflation rate back in line with the 2.5 percent ±1 percentage point flat target on a lasting basis, inter alia via the anchoring of inflation expectations over the medium term, in a manner conducive to achieving sustainable economic growth.   A significant part of the risks identified in the previous forecasting round have materialised since the release of the May 2025 Inflation Report. The most notable event was the adoption by the Romanian authorities of the first fiscal adjustment package. This package of measures is being implemented in an economic environment already marked by a visible cyclical slowdown, rendering fiscal policy markedly pro-cyclical. Under these circumstances and in the absence of quantifiable coordinates on the configuration of the next reform packages, it is difficult to foresee the extent to which economic growth will lose momentum and the horizon for its recovery, even when compared to relatively similar episodes in the past. Another materialised risk, with significant implications for the inflation path, is the rise in the electricity price after the capping scheme expired, the revised levels exceeding those envisaged in the prior forecast.   Geopolitical tensions persist, yet without notable increases, whereas the agreement in principle between the US and the European Union on tariff rates does not substantially alter the working assumptions in the baseline scenario. Hence, the balance of risks to inflation continues to be tilted to the upside, especially over the short term, given that uncertainties linger over the developments in administered prices – particularly for natural gas –, as well as over the possibility of further indirect tax adjustments. These uncertainties also fuel the risk of a weaker anchoring of economic agents’ inflation expectations over the medium term.   The short-term path of economic activity worsened, posing mainly downward risks, whereas inflationary pressures increased, largely as a result of raising indirect taxes. Looking ahead, additional wage claims could arise from the pressures to restore households’ purchasing power, dampened by the recent fiscal consolidation, as well as from the persistent structural features of the labour market, which remains relatively tight (see the Box).   Nevertheless, these pressures could exert a lower impact on inflation, at least temporarily, if companies opt for partial cost absorption, amid soft domestic demand, which limits the room for price adjustments. Conversely, in the absence of the authorities’ firm clarifications on the temporary or permanent nature of some of the fiscal adjustment measures, there is a risk that firms and consumers may revise inflation expectations upwards and anchor them to levels above the inflation target over the medium term.   Specifically, uncertainty about the inflation path, especially during 2026, remains high. The effect of these diverging influences may as well differ from the net disinflationary one assumed in the baseline scenario. This will hinge crucially on the clarity of economic policy messages, labour market dynamics, households’ behaviour in the face of lower real income, and on firms’ capacity to accommodate potentially higher wage costs or to pass them on into prices.   The adoption of the first fiscal consolidation package helped clarify where fiscal policy is headed in the near run, yet significant uncertainties still surround the medium-term prospects. The present economic context is marked by overlapping factors with a potentially divergent impact on inflation and economic activity. On the one hand, further indirect tax adjustments cannot be ruled out. On the other hand, there is a risk of income policy easing in 2026 H2, via possible pension and wage increases, which would counter the anticipated pace of disinflation at this horizon. At the same time, despite a relatively stable perception from rating agencies, uncertainties persist over the actual pace of budget consolidation, the magnitude of the economic impact of the fiscal package, the final design of the National Recovery and Resilience Plan, as well as, most importantly, over the authorities’ capacity to absorb the related funds. In these conditions, a swift clarification of the Next Generation EU framework becomes critical, given its potential to take off some of the downward pressure on domestic demand and to support potential GDP growth. Maintaining a consistent fiscal adjustment course, together with an efficient use of EU funds, is key to containing inflationary risks and strengthening economic growth sustainability.   The domestic economy is still exposed to significant risks, especially amid the subdued economic growth in the euro area, Romania’s main trading partner. Even though the recent agreement between the US and the EU has reduced some of the trade uncertainty, the new tariff rates are higher than those in force a few months ago and may speed up the reshaping of global value chains via reshoring and friend-shoring.   These shifts affect the direction and volume of international trade flows, thus reducing to some extent the potential for current account adjustment via competitiveness gains and export growth. Against this backdrop, the correction of the external deficit could become increasingly contingent on domestic policies to moderate demand, with a direct impact on import volumes. While this approach, also included in the baseline scenario, could help effectively correct the external imbalance over the short term, the adjustment costs for economic activity would likely be significant in the absence of a sustainable rebound in exports. Such a recovery would call for additional support from the economic policy mix, particularly via structural reforms that should strengthen the economy’s competitiveness over the medium term.   Monetary policy decision   Given the marked worsening of short-term inflation outlook following the expiry of the electricity price capping scheme on 1 July and the increases in VAT rates and excise duties as from 1 August in the context of implementing the corrective fiscal measure package, and considering the risks and uncertainties associated with the new projections, the NBR Board decided in its meeting of 8 August 2025 to keep the monetary policy rate at 6.50 percent. Moreover, it decided to leave unchanged the lending (Lombard) facility rate at 7.50 percent and the deposit facility rate at 5.50 percent. Furthermore, the NBR Board decided to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions. (Source:https://www.bnr.ro/)