Page 33 - RUSRptOct18

Deflation in macaroni & grain (another grain-linked category) softened to -1.7% y/y (from -6.4% y/y in July). Bread & bakery was on the rise too (2.5% y/y currently vs. 2.4% in July).
Non-food and services inflation are stable . VTBC estimates that non-food inflation will start to accelerate in September, reaching 4.6% y/y by YE18F.
VTBC reiterated its forecast for 4.5% y/y inflation by YE18F. The bank’s item-level inflation model points to 0.4-0.7% m/m price growth in the last four months of the year. That would result in 4.5% y/y by YE18F.
VTBC thinks that the main driving forces behind such acceleration are as follows.
• The uptick in grain prices. This usually translates into meat, bread and macaroni inflation: by YE18F, food inflation will reach 4.7% y/y (vs. 1.9% y/y currently).
• Growing demand-side pressure. This is reflected in the prices of non-regulated services.
• The forthcoming 2pp VAT base rate hike. We think this tax initiative will add 1.3pp to consumer inflation, with the effect front-loaded in the second half of 2018.
• Exchange rate pass through. Given that the adjustment to the FX shock lasts at least six months even the 6% m/m RUB depreciation that happened in April has not been totally priced in so far.
4.2.2 PPI dynamics
Russia’s producer price index of inflation (PPI) moderated in August from high levels seen over the summer, driven up by the higher than expected oil prices, Rosstat reported on September 19.
“For the fourth month in a row, producer prices saw double-digit growth. We argued in July that the bulk of this uptick could be explained by the rise in RUB oil prices as, since May, oil-linked goods make up more than 70% of the headline increase,” Alexander Isakov, chief economist at VTB Capital said in a note.
PPI inflation took off in March as oil prices grew relentlessly from an monthly average of about $65 in the first few months of this year to over $75 per barrel in the second quarter. In August, producer inflation slowed to 15.3% y/y, from its peak of 16.6% y/y in July, but oil prices remain high and were trading at $77 at the time of writing.
“The 1.3pp moderation can be traced in full to the prices of oil-linked goods, with producer inflation in the oil & gas industry down to 47.4% y/y, from 57.3% y/y in July. This development is once again totally due to RUB-Oil dynamics, in our view, as the latter started to moderate y/y on the back of the robust recovery in oil prices that set in roughly a year ago,” Isakov adds.
33 RUSSIA Country Report October 2018 www.intellinews.com