The spike in fruit & veg prices that soared following terrible weather in May appears over as the headline inflation rate fell to a new post-Soviet low of 3.7%.

The Central Bank of Russia (CBR) and investors will be relieved, as the headline rate is back below the 4% target that the central bank set for this year, which allows it to resume monetary easing at its next meeting in the middle of September.

Inflation has fallen all year to hit a low of 4.1% in May and the CBR followed through with a string of rate cuts. But the storms that swept the country in May turned fields into quagmires and sent the cost of staples like cabbage up 200%-300% in some regions. Inflation rose to a high of 4.4% in June causing the CBR to pause its rate cuts in July.

But the weather has cleared up and the summer harvest is in bring the price of fruit & veg down. Between 15-21 August, consumer prices stayed unchanged, according to Rosstat, after three weeks of 0.1% w/w decline.

“Given that the headline inflation continued to follow the downward path, this time breaking into the 3.6% territory (3.9% y/y reported for July). The accumulated year-to-date inflation has moderated to 2.2% (3.9% by the same week a year ago),” VTB Capital (VTBC) said in a note.

“The halt in seasonal weekly deflation came in line with our expectations published in the Morning comment of 21 August. Decline in fruit & vegetable average consumer prices has already hit the bottom with -3.6% w/w currently, compared with -3.9% two weeks ago. This implies that we have most likely reached an inflection point in the seasonal pattern, and in the coming weeks price growth is to oscillate in the 0.0-0.1% w/w range,” the bank said.

The slighter weekly decline in fruits & vegetables segment mainly came on the back of price uptick in cucumbers (+1.7% w/w vs. -3.3% earlier). At the same time, carrot prices were down 9.4% (-7.0% the week before), potatoes and apples lost 6.7% w/w and 1.7%, compared with -6.1% and -1.0% earlier, respectively. On a year-on-year basis, prices of all reported fruit & vegetable items, continued to moderate, except cucumbers and tomatoes, which reached 21.0% y/y and 2.2% y/y, vs. 12.8% and -3.0% by the end of July, respectively, VTB reported.

"As far as monetary policy is concerned, we expect the CBR to cut the key rate by 25bp (to 8.75%) at the BoD meeting that is to take place on 15 September. Though the headline inflation has already hit the target and, on our estimates, continues to trend downwards, we note that disinflation is mostly food-driven," VTBC said.