Consumer prices in Russia rose by 0.3% month-on-month in Russia in March 2018, in line with previously observed weekly inflation dynamics and bringing the annual inflation rate to 2.4% versus 2.2% seen in February.

"A breakdown shows that acceleration in food and services inflation was the main reason for the higher headline inflation," Sberbank CIB commented on April 9, in line with previous reports that Russian food inflation had stabilised in March after six months of decline.

The nadir of the recent post-Soviet low inflation has probably passed. The Central Bank of Russia (CBR) expects inflation to end this year at around 4% and the small rise in inflation in March was not a surprise.

The strong disinflation trend in Russia continued throughout 2017, overshooting the Central Bank of Russia's (CBR) initial target of 4% annual inflation to record-low 2.2% annual rate in January. But the prices might start crawling back to the CBR's target in spring.

"We expect that y/y inflation will likely further accelerate in April-May, driven by higher food prices, as well as a possible increase in gas prices, as they should catch up with higher prices on the wholesale market," Sberbank argued. 

That contrasts with other analysts that expect inflation to remain low in the next few months.  

“We expect y/y inflation to remain flat in the next 2 months before declining in June due to the base factor effect of last June. But, it is the August-October period that will define the 2018 inflation dynamic and contain the answer to future moves in the CBR's rate,” say BSC Global Markets analysts.

BCS GM analysts argue that food prices were the main driver of the uptick (0.5% m/m), while growth in the prices of non-food consumer goods (0.2% m/m) and costs of utility services to the population (0.1% m/m) was fairly subdued.

“Last month, seasonality pushed the prices of fresh fruit and vegetables up by 4.2% m/m, which is not unusual for this time of year. However, last year, prices in this category rose by just 0.3% m/m as the stronger ruble curbed traditional price increases for imported goods,” BCS said in a note.

“To a large extent, the CPI dynamic this year is likely to be driven by the base factor of last year as the effects from other factors – ruble exchange rate moves and harvest outlook – remain muted. This means that after a rise in y/y inflation in March (in March 2017 monthly CPI stood at a historic low of just 0.1%), the CPI rate will likely stabilize before it is likely to decrease in June to 2.1% y/y (in June 2017 monthly inflation spiked to 0.6% m/m),” BCS added.

As the chart shows inflation is subdued in the first quarter of the year and grows as spring wears on before plummeting in the summer months when Russians typically reap the harvest from their dachas that drives food prices down. So far this year inflation is running slightly ahead of last year that recorded record lows. Just how far and fast inflation rises in the upcoming summer season will determine the trend for the year.

VTB Capital on April 9 forecasts that inflation will be back to 4% in September, expecting the annual price growth at 4.4% by the end of 2018 due to improving consumer confidence, robust real wage growth (induced by public wage indexations) and expanding retail lending, all complemented by the low base effect of the second half of 2017.

"In terms of monetary policy, the [March inflation] report adds more arguments for expecting another 25bp key rate cut on 27 April," VTB believes.

The Central Bank of Russia on the March 23 policy meeting of the board continued cutting the key interest rate lowering it by 25bp to 7.25%, in line with the dovish guidance at the previous February meeting.

In an accompanying press release the CBR as usual highlighted existing risks of future rise in inflation. However, the regulator reiterated its view that it intends to bring its benchmark rate to "normal levels" in real terms by the year-end. 

"In CBR's language the latter means 2.5-3% real rate which means that the actual rate will be linked to the level of inflation at the time," BCS Global Markets commented on March 23, reiterating the 4% forecast for 2018 inflation.