Headline inflation in Moldova (chart) decreased to 4.2% y/y in December from 5.5% y/y in November, dropping below the target inflation rate (5%) and the monetary policy rate (4.75%). 

This was largely due to the consumer subsidies paid for electricity, natural gas and district heating that pushed end-user prices for these items down by 4%, 23% and 42% respectively in the last month of the year compared to November.

Compared to November, prices decreased by 0.44% m/m thanks to the energy subsidies, while the food and non-food prices increased by 0.8% m/m and 0.4% m/m. The prices of services (which include the delivery of energy) contracted by 3.8% m/m and were only 2.5% higher compared to the end of 2022.

A more general driver for Moldova’s inflation, which plummeted from 35% y/y last autumn, can be found on the demand side. Moldova’s economy posted negative q/q growth rates in Q2-Q3 and the outlook remains bleak for the whole year despite rather optimistic projections issued by the European Commission (+1.7% under the November 15 Autumn Forecast) and the World Bank (+1.8% under the Global Economic Prospects on January 10).

Speaking of the annual inflation rate, the electricity and natural gas prices fell by 43% and 12% respectively, in December, compared to the end of 2022. The electricity prices are, however, not sustainable in the long term as they are the result of an arrangement that capitalises on the free natural gas supplied by Russia to the separatist region of Transnistria.

Food and non-food prices increased each by some 4.6% y/y, in December.