Page 30 - RPTRusFeb17

4.2.1 CPI dynamics
Rosstat’s report shows inflation down to 5.0% y/y in January, slightly less than the Bloomberg consensus of 5.1% y/y. All subcategories have contributed to the slowdown, and the core inflation went down to 5.5% from 6.0% in the previous month.
We are likely to see February break into the 4-handle territory. However, the coming quarters could well see a bumpier ride, with price growth driven on the one hand by persistently positive real rates limiting demand growth and, on the other, by another round of the exchange rate pass-through effect due to the economy adapting to the fiscal rule.
Inflation momentum has remained almost unchanged at 4.8%, according to VTB’s estimates, with some reshuffling among the subcomponents, i.e. food has been contributing more to disinflation, while services where slightly up.
Annual inflation (which is focused on how inflationary tendencies in January 2017 compare with what they were a year ago) shows that the most visible change is the 0.5pp decline in the services inflation from 4.9% y/y in December 2016 to 4.4% y/y last month. The reason for that is the dynamics of international travel, which is the most sensitive of the services components to FX: it was down -5.3% y/y in January. This is one of the ‘temporary’/supply side effects to which the CBR refers in its press release, and is going to reverse in the coming months.
Inflation expectations are improving , according to the CBR/Public Opinion Fund survey. The median of the expected 12mo inflation is down to 11.5%, which is the lowest since mid-2014, while the%age of those surveyed that believe the CBR will be able to hit the 4% target is also at a record high of 23%. The CBR’s own adjusted measures of inflation expectations also improved to 4.6-4.7%. The robustness of this trend might be temporarily challenged during the transition phase of the fiscal rule due to the latter’s sensitivity to the exchange rate volatility.
4.2.2 PPI dynamic
Russia's Producers Price Index jumped in January to 12.7% year-on-year and 3.3% month-on-month, the statistics agency Rosstat reported on February 17. In year-on-year terms PPI was markedly higher than 7.4% posted in December 2016. The PPI breakdown shows that the acceleration of producers' prices growth was mostly driven by the extraction segment, which showed a PPI of 25.2% in January. Extraction and production costs for oil increased by 19%, for natural gas by 7.8%, for coal by 5.2%, and for iron ore by 21.7%, according to Rosstat. Meanwhile, producers' price growth in the manufacturing sector was less pronounced at 10.4% y/y and 1.5%. Also in manufacturing the PPI was pushed by higher fuel costs: ship fuel became 15.8% more expensive and light oil fuel gained 7.8%. Machinery and equipment for the metallurgy segment and extraction became 16% more expensive, perhaps reflecting the ruble strengthening making imported equipment more expensive in ruble terms (machinery and equipment accounts for about 40% of total Russian imports). Higher PPI in January, although alarming for the general disinflationary trend, did not seem to affect the consumer prices. CPI decelerated to 5% y/y in
30 RUSSIA Country Report February 2017 www.intellinews.com