No deflation in August, by year-end inflation is likely to exceed 4%

RUSSIA ECONOMICS - In Brief 04 Sep 2020 by Alexander Kudrin

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Rosstat reported that m-o-m inflation was at 0% in August, even though some deflation due to seasonal factors was earlier expected. Even though prices of fruits and vegetables fell, so that food prices in total were down by 0.9% m-o-m, and by 1.0% y-o-y, it was not enough to offset increased prices of services and durable goods. Communal and housing services prices were up by 0.3% m-o-m and remained flat y-o-y. Services prices in total were up by 0.4% m-o-m (0.2% y-o-y). Prices of durable goods increased by 0.4% m-o-m and 0.2% y-o-y – not least due to a weaker ruble. Overall, CPI increased in August by 3.6% y-o-y and is likely to go up in the remaining months of the year. The passthrough effect of a weaker ruble will continue to pull prices of imported durable goods up in September, and due to a base effect (small deflation m-o-m seen in September 2019), y-o-y inflation will keep going up this year. Given the current trends, inflation by year-end may exceed the CBR medium target of 4%. An unlucky combination of a premature additional 25 bp rate cut in July, which reduced appetite for Russian bonds and the Navalny case, which could trigger new sanctions on Russia, weakened the ruble. Even though the CBR will be able to reach its 4% inflation target very soon and accomplish its inflation targeting mission, the current inflation target looks excessively high and is unjustified by Russia’s economic fundamentals. There was no need to bring inflation up from below 3%, i.e. levels seen earlier. Hence, no more room for the key rate cut.Evgeny GavrilenkovAlexander Kudrin