Temporary increase to give way to inflation decline in H2

Inflation data for the first two weeks of January 2019 are in line with the Bank of Russia’s baseline forecast. Inflation is expected to temporarily rise in early 2019, primarily on the back of the VAT rate hike and the 2018 weakening of the ruble. According to the Bank of Russia’s forecast, annual inflation will go down in H2 to reach 5.0-5.5% as of the year-end and return to the Bank of Russia’s near 4% target in early 2020. This is given in the latest issue of ‘Consumer Price Dynamics: Facts, Assessments and Comments’, a commentary.

In December 2018, annual inflation came in at 4.3%, which is close to the upper bound of the Bank of Russia’s forecast (3.9-4.2%). The rise in inflation is primarily triggered by the ruble’s weakening, rising costs, and the adjustment in supply to meet demand in certain food markets.

The most tangible growth was registered at the end of the year in food inflation (4.7% vs 3.5% in November). This was largely associated with highly volatile fruit and vegetable prices. It was in part affected by the weakening of the ruble.

That said, non-food prices rose somewhat slower in December (4.1% vs 4.2% in November). Annual petrol price growth fell by 1.7 pp to 9.4%. This was associated with the effective agreement between the Government and the oil majors. The annual service price growth rate remained virtually unchanged in December at 3.9% vs 3.8% in November.

The inflation data for 1-14 January 2019 (4.7% YoY) are in line with the Bank of Russia’s baseline scenario. Annual inflation will peak to its highest readings in spring to take a downward track in H2 and return to the Bank of Russia’s near 4% target in early 2020.