Despite the Central Bank of Russia (CBR) warning of rising inflation in the rest of the year following the government’s decision to increase VAT, inflation fell modestly in June to set a new post-Soviet record low of 2.3% y/y, Rosstat reported on June 9.

In summer many Russians move to the dacha and work in the garden. The modest decline in Russian inflation in June, to 2.3% y/y, was mainly a result of a sharp fall in fruit and vegetable inflation. And while headline inflation is still weak, there were some tentative signs in the data that broader price pressures may be starting to build.

“Last month’s figure was lower than May’s outturn of 2.4% y/y but slightly higher than the Bloomberg consensus forecast of 2.2% y/y,” Capital Economics said in a note. “The big picture is that inflation has now hovered at rates of 2.2-2.5% y/y for eight months, well below the central bank’s 4% inflation target.”

The breakdown of the data showed that the decline in the headline rate between May and June was a result of lower food inflation – something that happens every year. Food prices fell by 0.2% y/y last month, having risen by 0.4% y/y in May.

There are early signs that broader price pressures are beginning to build. Services inflation ticked up, while May’s Markit Services PMI underperformed, which shows that the recovery is still fragile.

“Inflation in non-food goods continued to rise – the latter may be a sign that the fall in the ruble in April may be having a lagged impact on inflation. Rosstat’s measure of core inflation, which also includes some food products, rose from 2.0% y/y to 2.3% y/y,” Capital Economics reports.

But the big unknown for the rest of the year will be how big an impact June’s VAT hike will be. Analysts are expecting inflation to climb back to around 4% by next year and also the CBR will slow its monetary easing in anticipation of the increased inflationary pressure from the tax hike.

“It was clear from last month’s central bank Board meeting that the VAT hike due to come in to force at the start of next year has limited the scope for monetary easing. Some of the trends seen in today’s data are likely to reinforce policymakers’ somewhat more hawkish shift,” Capital Economics said in a note.

“However, this doesn’t rule out a resumption of the easing cycle – the headline rate is still very low (and may even fall further in July) and spare economic capacity will keep a lid on underlying price pressures. We still think the policy rate will be cut to 6.00% by early 2020, from 7.25% now.”