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Inflation to gradually return to target

12 February 2020

Inflation slowed down considerably to 2.4% in January. However, these year-start dynamics were expected given the ongoing effect of temporary factors which contain price growth and the exclusion of the VAT increase and utility rate indexation in January 2019 from the calculation of inflation. That said, there are prerequisites for inflation gradually returning to the 4% target. These are the findings by the authors of the latest issue of Talking Trends, the Bank of Russia’s Research and Forecasting Department’s bulletin.

In December—January, annual inflation remained on a downward trend coming closer to the turning point. Despite the fact that short-term disinflationary risks still prevail over proinflationary ones and the rise in prices for the consumer basket components most resilient to the effect of temporary factors is below the pace which will bring inflation to 4% as of the year end, prerequisites are emerging for inflation gradually returning to the target. As the effect of temporary factors containing price growth abates and economic activity shows signs of revival, this inflation trend will be further driven by the time-lagged effect of the Bank of Russia’s monetary policy decisions.

Growth of the Russian economy accelerated in the second half of 2019 to the near-potential rate. Leading indicators also suggest that the Russian economy will retain these growth rates in the upcoming quarters unless there are new considerable external shocks. Last year, domestic demand was a driver of economic growth which allowed offsetting a significant negative effect of subdued growth of the global economy on Russia’s GDP. The accommodative fiscal policy and monetary easing will underpin domestic demand in 2020.

The views and recommendations expressed in the bulletin do not necessarily reflect the official position of the Bank of Russia.

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