Falling fruit and vegetable prices are key deflation factor in July

Annual inflation dropped to 3.9% in July 2017. This resulted from a fall in fruit and vegetable prices after June growth, which defied traditional seasonality. Inflation has still tended to anchor close to target, and the proportion of goods and services posting price growth close to the 4% inflation target is increasing, the new issue of the Bank of Russia’s informational and analytical commentary ‘Consumer Price Dynamics’ reports.

The seasonal decline in fruit and vegetable prices, whose June growth had been a key driver of increased inflation, exceeded the Bank of Russia’s expectations.

A decline was registered in the prices of potatoes, cabbages, onions, beetroots, carrots and garlic: essential vegetables in the Russian shopping basket. Prices in this product category fell by 16% on average over the month. The decline in prices of these products was registered in all federal districts.

As real disposable household income has ceased to fall, consumer demand is recovering progressively and easing its constraint on inflation.  However, this does not incur any considerable inflation risks as production activity shows sustainable growth. Nevertheless, the risk remains of elevated food price inflation in the months to come, caused by a likely drop in the harvest of some fruit and vegetables. This may also push inflation expectations up. A moderately tight monetary policy stance will mitigate inflation risks.