Page 62 - RusRPTJul23

The slight rise in the headline inflation rate was primarily driven by an increase in services inflation, which surged from 9.4% y/y to 11.0% y/y. This exceeded our expectations of 10.5% y/y and reflected significant price hikes in passenger transport and foreign tourism last month.
On the other hand, food inflation experienced a sharp drop from 0.0% y/y in April to -0.9% y/y. This marked the largest y/y decline in food prices since at least 2002 and can largely be attributed to favourable harvest conditions in recent months. Inflation for fruits and vegetables came in at -9.1% y/y. Non-food goods inflation showed a slight increase from -0.3% y/y to 0.2% y/y. Goods prices rose by 0.3% month-on-month, which remains relatively moderate, and there is no compelling evidence yet that the recent weakness in the ruble is driving up consumer prices.
Capital Economics anticipate that inflation will continue to rise in the coming months as pro-inflation risks, including widespread labour shortages, increased government spending, and ruble depreciation, materialise. Capital Economics' expectation is that inflation will exceed the central bank's target of 4% in the third quarter and end the year towards the upper end of their forecast range of 4.5-6.5%.
During its recent meeting, the central bank sent the strongest signal yet that it is preparing for policy tightening in response to the various risks to the inflation outlook. Capital Economics believes that the central bank would not require substantial evidence of building inflation pressures to justify raising interest rates. Therefore, we maintain our forecast of a 50 basis point interest rate hike to 8.0% by the end of the year.
Inflation expectations of Russian households stood at 10.2% in June 2023 and were at their lowest level since March 2021, the Central Bank said in its comment on June 26. "According to a survey by the InFOM company, inflation expectations in June 2023 declined to their minimum since March 2021 over the annual period. Their median estimate totaled 10.2% (down 0.6 percentage point (pp) against May; minus 1.3 pp against the Q1 2023 average," the regulator said. Under the forecast of the Bank of Russia, inflation in Russia will stand at 4.5-6.5% in 2023 based on the pursued monetary policy and will return to 4% in 2024.
62 RUSSIA Country Report July 2023 www.intellinews.com