Russia's inflation decline continues with 5% posted in January

Russia's inflation decline continues with 5% posted in January
By bne IntelliNews February 7, 2017

Russia's annual inflation in January 2017 came to 5% year-on-year, according to the February 6 report by the Rosstat state statistics agency. Month-on-month consumer price growth in the reporting month amounted to 0.6%.

The disinflation trend in Russia is continuing after CPI was curbed to 5.4% in 2016. Inflation slightly outperformed the central bank's target of 5.5-6% and more than halved compared with 12.9% year-on-year seen in December 2015.

The decline of y/y inflation in January to 5% was in line with analysts' expectations based on weekly previous weekly data.

In m/m terms food prices remained the main inflationary driver, rising by 0.9%, with both services and core inflation moderating in January to 0.5% and 0.4% m/m, respectively. In y/y terms services and core inflation also declined to 5.5% and 4.4%, respectively, from 6% and 4.9% seen in December.

"While the overall figure is positive per se, the outperformance of food prices is a cause for concern," Alfa Bank warned on February 7, cautious that January's acceleration in food inflation could signal that consumer sentiment is picking up due to continuing growth in salaries and a one-off government payment to pensioners.

Alfa continues to be alarmed by signs of rising poverty levels, noting that "it is not surprising there is a positive uptick in consumption evident only in the food segment" as the "improvement in revenues is taking place against a backdrop of rising poverty levels". 

At the same time, recent inflationary pressures such as transportation tariffs hike and higher excise duties on petrol could have not yet fully fed through the inflation numbers in January.

"The significant slowing of inflation to 5.0% YoY suggests that weak consumer demand made a substantial contribution to the existing disinflation trend, offsetting the negative effect of the indexation of certain transportation tariffs and excise duties at the beginning of this year," Gazprombank commented on February 7.

Despite the decline in consumer price growth, the inflation-minded Central Bank of Russia (CBR) is maintaining its cautious monetary policy.

At its February 3 board meeting the regulator kept the key interest rate unchanged at 10% and took a firmer stance in its accompanying statement, saying a further rate is now unlikely in the first half of 2016 due to a mix of external and domestic factors.

Gazprombank sees the CBR’s concerns mentioned in its statement regarding the further prospects for inflation seem justified, and even sees the risks persisting in the second half of 2017, when the government usually revises its annual budget expenditure plans. Alfa Bank also believes that CBR's conservative stance is justified, given the above average food inflation in January.

The next meetings of the CBR board will take place on March 24, April 28, and June 16.

"The CBR's commentary was almost entirely in line with our expectations, but the wording that the chances of a key rate cut in 1H17 had decreased could mean that even our cautious forecast of a rate cut in April could turn out to be too optimistic," Gazprombank said on February 3.

"Although we do not rule out the potential deceleration of inflation to 4.8% YoY in February, we doubt that the CBR will be ready to cut the key rate before June," the bank's analysts wrote on February 7 following the latest inflation data.