ING: Inflation in Russia ‘off its peak but not out of the woods’

The Russian Consumer Price Index (CPI) slightly decreased in April, but analysts don’t expect further relief until the end of the year. Inflationary risks including global agricultural inflation and elevated household and corporate expectations are hampering the slowdown.

The Russian CPI slowed by 0,3% to 5,5% year on year in April and is likely to remain around that level until November-December, according to ING Think. However, this slowdown shouldn’t be considered a sign of sustainable relief. It was mostly caused by a higher base effect, as in April 2020, inflation jumped by 0,6% compared to the previous month due to the pandemic-related lockdown.

Deceleration was registered only in some food segments, such as fruits and vegetables, cereals and beans. Other major food groups (bread, meat, fish, dairy and sugar) kept growing at a pace close to the previous month. As for non-food products and services, they kept registering higher annual growth rates, so their contribution to the overall CPI growth increased from 3% in March to 3,1% in April, estimate the analysts. The largest increases were registered in prices for petrol (5,9% year on year despite the government’s measures), construction materials and various services including medicine, local recreation and insurance.

In the coming months, ING expects inflationary pressure to remain high citing several reasons. First, supply concerns and strong demand are pushing global agriculture prices up. Second, ING points to the elevated Producer Price Index and corporate inflationary expectations, which are another risk factor for the local consumer prices, as well as elevated CPI expectations by households. Besides, the local CPI does not yet fully reflect services in COVID-affected spheres, such as foreign tourism. All these factors may prevent disinflation in the near future.

Thus, the CPI is expected to stay around 5,5% year on year until November despite the favourable base effect with a possible minor uptick in May. Only in December, the higher base effect should be strong enough to assure annual inflation falling to 4,5% year on year, the analysts say. They also assume that the index can potentially fall to 4% in the first quarter of 2022 but warns that those expectations look optimistic given the current risk profile.

Bank of Russia is likely to keep tightening its monetary policy, considers ING. The current key rate of 5% has a 50-basis-point upside this year, which may be realised during the bank’s next board meetings.

By Anna Litvina