A rise in inflation estimates came as a result of this year’s severe draught, which led to an 8-9 percent increase in food prices. Moreover, the price of grain rose worldwide and the national currency had a floating exchange rate, which also led to higher inflation. Furthermore, the impact of food prices on inflation is harsher in Romania, since foodstuffs make up some 40 percent of the basket of consumer goods, compared to the European average of less than 20 percent.
By the end of 2007, inflation will amount to 5.7 percent and is expected to drop to 4.3 percent in December 2008.
All risks considered by the central bank three months ago, following the presentation of the half-year report on inflation, have become a reality and led to higher inflation than foreseen - a rapid increase in salaries, higher than labor productivity, a wider current account deficit, pressures brought about by public spending during election campaigns (lawmakers for the European Parliament are to be elected this November), and record-high oil prices. "To avoid dangerous side-slips, the government has to lead a prudent fiscal policy, since the monetary policy has a limited impact," Isarescu said.
