Page 36 - RusRPTMay20

4.2.1​ CPI dynamics
Russian CPI accelerated from 2.3% year on year to 2.5% y/y in March, which​ is well below the 2.8% y/y suggested by the preliminary weekly data and 2.7% y/y consensus. Inflationary risks are not as high as in the previous episodes of market turmoil and not as relevant for the key rate says economists. Inflation picked up in March, but much more modestly than expected and remains comfortably below the 4.0% target. Analysts see an acceleration in coming months due to RUB depreciation and global agro inflation, but the inevitable drop in consumer demand will be a constraint. The central bank will choose between a hold or cut in 2H20, depending on CPI trajectory.
Adjusted for seasonality, CPI in March accelerated to +0.55% m/m SA
(+6.8% SAAR), according to VBTC. The run rate of the same level was previously observed in January 2019, when the VAT rate was increased.
While roughly two thirds of the acceleration in the seasonally-adjusted headline growth number can be attributed to food inflation, spurred by the front-loaded demand for food, the FX-sensitive components of inflation within both food and non-food were also at play, according to Alexander Isakov, chief economist at VTB Capital said in a note.
“Thus, the question, 'How long will it take for seasonally-adjusted inflation to stabilise and return to a target-consistent level?' breaks down into two: (i) how persistent is FX pass-through going to be? And (ii) when are front-loaded food product purchases going to be over? The weekly CPI data shows that price growth of most of the FX-sensitive items in the available weekly statistics has decelerated, which might be indicative of FX pass-through having passed its peak.” Isakov says his preferred gauge of demand-driven inflation, namely s-core inflation, has remained close to the target-consistent level, indicating that the front-loaded demand for food products is transitory and is not underpinned by consumer sentiment.
But some open questions remain regarding the April inflation report: how will the data be collected on a significant portion of services and a range of non-food goods given the limitations on mobility that have been put in place across Russia.
“A significant portion of the April data on non-food goods and services (such as travel) might have to be imputed. This could have an effect: it might moderate the sensitivity to FX, depending on the approach Rosstat uses,” says Isakov.
36​ RUSSIA Country Report​ May 2020 ​ ​www.intellinews.com