Food inflation in Russia, which has stabilised after six months of decline, has been the main driver of inflation in recent years. Inflation is currently at a post-Soviet low but the Central Bank of Russia (CBR) is predicting that inflation could rise again later this year, which could bring its easing cycle to an end.

Rosstat reported that inflation remained flat at +2.2% y/y in February on March 6, as prices edged up just +0.2% m/m, or +0.1% m/m in seasonally adjusted terms, according to Alexander Isakov, chief economist at VTB Capital (VTBC).

“Behind the overall no change in the headline inflation rate, we see a slight alteration in the price growth pattern: food inflation edged higher for the first time since mid-2017 to 0.9% y/y, while the offsetting downward pressure came from the services inflation where the slowdown can be traced back to the modest indexation of transportation prices in January. Our s-core gauge of demand still shows that the inflationary environment remains fluid, with inflation flat at +4.3% y/y.”

Last year inflation was reduced partly by the all time record harvest and the impact of agriculture on inflation has been large. Russia brought in a harvest of 135mn tonnes of grain, but inclement weather in May sent the cost of vegetables soaring and caused a blip. This year Russia is on track for another big harvest, ahead of the average yield of 110mn tonnes even if it will be shy of last year’s record crops.

“While stabilization of inflation at the low level of 2.2% y/y is certainly a positive and a solid argument for another rate cut by the CBR, a closer look at the price data shows a build-up of inflationary pressures, particularly in the fresh food segment. We expect y/y inflation to grow moderately in March-April,” BSC Global Markets chief economist Vladimir Tikhomirov said in a note.

Food inflation edged for the first time since it started to descend in July 2017. It added 0.2p in February after the low of +0.7 y/y in January.

The most visible annual changes are still in sugar, where the decline eased to -20.1% y/y from -22.5% y/y in January, and in eggs where prices fell -11.2% y/y in February from -13.7% y/y the month before, reports VTBC. The price momentum in meats is the opposite, with prices sliding -2.9% y/y in February vs. -0.2% y/y a month earlier.

“Rosstat does not provide much detail in the initial release, with the meat category bundled together with poultry and various kinds of meat, so later releases will provide greater opportunity to establish the sources of the decline in prices,” Isakov said in his personal blog.

The non-food category saw most items remaining flat in January. Inflation in non-food category edged lower to +2.5% y/y, from +2.6% y/y a month ago, with inflation across the items roughly aligned.

Services inflation echoes January’s modest indexation of transport fees, says Isakov. The overall inflation in services edged lower to +3.7% y/y, from +3.9% y/y in January, with transport tariffs inflation going down sharply, from +6.8% y/y as recently as December to just +1.4% y/y in February (quite a dramatic move for a predominantly regulated category). “We expect the indexation to catch up later in the year and bring price growth in this category closer to the 4% target,” says Isakov.

One of the biggest drivers of inflationary pressure is the population have yet to be convinced that the current low inflationary environment is going to last. The CBR’s surveys last year showed that Russians were expecting inflation to return to 7-8% and that has lead the CBR to be more cautious when cutting rates. Having said that the CBR surprised with a 25bp cut in January and suggested that it was now shifting slowly from setting interest rates to control inflation pressures, to cutting rates to support faster economic growth.

“CBR has reported that inflation expectations continued to decline in the most recent poll conducted mid-February. The median response expects prices to rise +8.4% in the coming 12 months, which is 0.5pp less than the survey in previous months suggested. The perception of current inflation was also the lowest on record, at +9.4% y/y. Alongside the decline in inflation expectations, the survey shows an improvement in consumer confidence, with the respective index close to the pre-2014 recession levels,” says Isakov.

“Given the higher consumer confidence, robust recovery in real wages and retail lending, the low base effect of the previous year created by the food supply and stronger exchange rate, we expect inflation to normalise in the coming months and estimate the full year inflation at +4.5% y/y,” adds Isakov.