Page 45 - RusRPTFeb23

4.2.1 CPI dynamics
The softer-than-expected inflation reading in Russia in December, of 11.9% y/y, is likely to be followed by further sharp falls in the coming months towards 4% as last year’s surge in prices passes through. But the central bank will look through this temporary collapse in inflation and remain focused on pro-inflation risks.
Capital Economics think the risks are becoming skewed towards interest rate hikes later this year.
Consumer prices rose by 0.8% m/m in December, up from 0.4% m/m in November, but much less than the consensus forecast of 1.0% m/m. The y/y inflation rate fell slightly from 12.0% to 11.9%.
Most of the upwards pressure on headline inflation came from services. Services prices rose by 2.0% m/m in December and the y/y inflation rate surged from 11.2% to 13.2%. This largely reflected the impact of the government bringing forwards its annual re-rating of utility tariffs from June 2023 to December 2022 and increasing the size of the hike. Utility prices rose 13.5% y/y. (See Chart 1.)
Food and non-food goods inflation remained soft. Food prices rose by 0.6% m/m and the y/y inflation rate fell from 11.1% to 10.3%. Non-food goods inflation fell from 13.4% y/y to 12.7%. (See Chart 2.) Goods prices rose by just 0.05% m/m in December, the fifth consecutive month at which price increases have been stuck at or around zero. Again, most of the weakness was concentrated in durable goods such as TV and appliances and is largely a reflection of the weak consumer demand backdrop.
Headline inflation is likely to fall sharply in the coming months as the surge in prices from February 2022 falls out of the annual price comparison. We think inflation will temporarily fall below the central bank’s 4% target from April before rebounding and ending the year at around 6% y/y.
The central bank will focus more on underlying inflation dynamics and the inflation outlook. In December, the CBR said that inflation risks have become slightly more skewed to the upside, in part due to the fall in labour supply last year. The recent weakening of the ruble will be another concern. If inflation risks begin to materialise, there is a chance that interest rate hikes – rather than further cuts – come onto the agenda.
45 RUSSIA Country Report February 2023 www.intellinews.com