Inflation Implications of Changing the Consumption Basket Weights in Romania and in the Region

Laurian Lungu

By Ella Kallai

Main points:

  • Weights changes of the consumption basket in Romania were inflationary after the outbreak of the pandemic, adding to headline inflation up to 2 percentage points in 2022.
  • From May 2023 onwards, changes in the consumption basket have been beneficial to the disinflationary process
  • The structure of the consumption basket in Romania differs consistently from that in the euro zone and the countries in the region across several product categories. This could imply a greater degree of divergence between domestic inflation and that of the euro zone
  • Thus, there are structural reasons for monetary policy to be more conservative both in the period of tightening and in the period of relaxation of monetary policy vis-à-vis countries in the region

As of 2022 inflation in the countries in the region (i.e. Czechia, Hungary, Romania and Poland) exceeded inflation in the euro area by more than during the period prior to that year (Fig. 1). With the exception of Romania, the inflation differential registered a steep increase until 2023Q1, after which it trended downwards continuously. Inflation differential in Romania versus the euro zone had a winding trajectory without showing signs of decreasing. In the non Eurozone (EZ) countries in the region, by default, inflation has been inherently higher compared to the EZ as the medium-term inflation target of the central banks in these countries, with the exception of Czechia, is higher than the European Central Bank’s target of 2%. The medium-term inflation target range is 3%±1% in Hungary and 2.5%±1% in Poland and Romania. The Czech central bank has the same objective as the European Central Bank. After 2022, other factors, both external and internal, caused the differential versus euro area inflation to widen.

The harmonized index of consumer prices (HICP), which is the official measure of consumer price inflation in the European Union, refers to the same group of products, which are the subject to monetary transactions carried out by households on the territory of a country. So, differences in the index among countries reflect both different dynamics of the prices of the products included in the consumption basket and different consumption habits as being reflected by the weights of the products in the consumption basket.

The product categories included in the HICP are those from the Classification of Individual Consumption According to Purpose made by the United Nations Organization. The weights of the 12 categories of consumer goods and services that make up the HICP reflect the weight of expenses incurred with these products in total expenses two years ago. The weights of the individual products that determine the structure of the consumption basket change every year. The change in the structure of the consumption basket can itself influence the variation of the price index. The difference between actual HICP and HICP calculated with the prior weights of the consumption basket (i.e. from 2020) shows that in Romania – and to a less extent in Czechia – the change in the consumption basket was inflationary in 2021 and 2022 and then disinflationary in 2023 (Fig. 2). In 2021, the weights change in the consumption basket, when compared to 2020, added one percentage point to the HCPI index, and in 2022 two percentage points. Instead, in 2023 the influence of the consumption basket was inflationary until March when it generated 1.2 percentage points of the current HICP, after which it became disinflationary, reducing the HICP by up to 0.8 percentage points in December 2023. The disinflationary effect was mitigated in the first two months of 2024, the change in weights reducing the price effect by 0.4 percentage points in February 2024.

The changes in the consumption basket weights vs. 2020 were significant in Romania especially for the group of agriculture-food and non-alcoholic beverages, although not as large as in the other countries (Fig. 3). There were four groups of goods for which the share in the consumption basket increased compared to 2020 in all the years that followed: 1. agriculture-food products and non-alcoholic beverages, 2. housing, water, gas, electricity and other fuels, 3. health and 4. education. The groups of products that lost significance in the total expenditure of the population were: 5. alcoholic beverages, tobacco, 6. clothing and footwear, 7.transport, 8. communications, 9. hotels and restaurants. The group of recreation and culture products, as well as the group of furnishing and household equipments, was resilient to shocks, the expenses for these categories of goods were relatively stable throughout the period, not being products that represent necessities, the expenses were adjusted in the opposite direction of price developments.

The greater the differences in the spending structure compared to the euro zone, the more likely inflation could be different (Fig. 4a). This means, implicitly, that monetary policy might need to perform differently in order to achieve the common objective of price stability. Romania distinguishes itself from other countries by the high share of food expenses (Fig. 4b), mainly of expenses with unprocessed food products (Fig. 4c), compensated by the low share of expenses with restaurants and hotels, of recreational activities, in general of services (Fig. 4d). Given this, the price index in Romania has a higher endogenous volatility compared to other non-EZ countries in the region, a fact that cannot be overlooked by monetary policy (Fig. 5). And, the fact that structural changes in the consumption basket can add anything between -1 to +2 percentage points to inflation in times of crisis urges caution regarding monetary policy decisions in both tightening and easing cycles. This is actually what happened, both in terms of the start of the tightening monetary policy cycle for the non-EZ countries the region (Romania and Poland started in October 2021 while both Hungary and Czechia started in June 2021) and in terms of the magnitude by which interest rates rose (5.75 percentage points in Romania versus 6.75 percentage points in Czechia, 12.4 percentage points in Hungary and 6.65 percentage points in Poland). The same pattern is observed on the loosening cycle of montary policy (Fig. 6). In Poland the first interest rate cut was in September 2023, in Hungary in October 2023 and in Czechia in December 2023. Romania still has to wait for the start of the monetary policy easing cycle.

 

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