June inflation falls below 5%; monthly inflation is close to zero

RUSSIA ECONOMICS - In Brief 08 Jul 2019 by Marcel Salikhov

Rosstat published today June 2019 CPI data. As was expected from weekly estimates, June inflation was close to zero on a monthly basis (+0.04% m-o-m) while annual inflation fell from 5.1% y-o-y in May to 4.7% y-o-y. The main reason for the rapid decrease in inflation last month was food prices dynamics. Traditionally seasonal decline in food & vegetable prices starts in July and continues in September. This year the process began in June (-4.5% m-o-m) and it had a significant impact on headline CPI number. Core CPI declined from 4.7% to 4.6% y-o-y in June. Basically June CPI data supports further cuts from CBR. Chart 1. Contribution to annual CPI by major groups, January 2013 - June 2019Source: Rosstat, IEF estimatesFrom July 1 there was a traditional increase in prices for regulated services (housing, electricity, etc). Another short term pro-inflationary factor is an increase in gasoline prices after the agreement between the Government and oil companies expired in July 2019. In 1H19 consumer gasoline prices decreased 0.5% and diesel prices increased only 1.3%. At the same time, there was increase in VAT rate and a significant increase in excise duties in 2019, which was not yet transmitted to consumer prices. So we believe that will be a more substantial increase in fuel prices in the next months. We believe that in the next couple months, annual inflation will fluctuate around 4.5-4.7% y-o-y. In a recent interview to Reuters CBR Governor E. Nabiullina hinted that the Board discussed possible cut of 50 b.p. We believe that CBR will cut just 25 b.p. on July meeting. An additional reason for CBR for a more conservative cut is that inflationary expectations haven't imp...

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