Russia Watch: CPI is slowly decelerating, but still more rate hikes ahead

In April, CPI slowed down to 0.6% mom and 5.5% yoy. Besides a considerable drop in yoy terms amid the high base effect, monthly dynamics decelerated on the fading of a spike in food prices. CBR combats inflationary risks with past and expected further rate hikes.

CPI decelerating for 3rd month in a row

Rosstat, RBI/Raiffeisen Research

According to Rosstat, in April, the consumer price index (CPI) declined to 5.5% yoy after 5.8% in March. Such a significant drop in yearly price growth is related to the one-off high base effect of April 2020 (0.72% mom seasonally adjusted and 0.83 mom non-seasonally adjusted), which was affected by panic-driven customer demand during the introduction of Covid-19 restrictions. Besides leveling off in yoy terms, we observe a 3-month decelerating trend in monthly terms (0.47% mom seasonally adjusted in April 2021). Apart from surging egg prices (>30% yoy starting from March based on weekly prices), there were no “outlier” in the most recent data — CPI single-item food spikes calmed to a certain extent. Particularly, the meat and poultry input in mom dynamics declined from 15bp to 4bp. As we previously stated, such food price spikes put lasting upward pressure on the yoy CPI figures but should fade from monthly dynamics.

Unlike positive Rosstat data dynamics, the results of the poll on inflation expectations by the CBR showed a surge in April. Observed inflation rocketed to 14.5% (12.7% in March), and expected inflation — to 11.9% (from 10.1%). The increased Russian rouble volatility is the main point of concern for the poll participants. Nevertheless, the CBR’s governor E. Nabiullina claims that impact of the short-term volatility of local currency is minor — 0.5-0.6bp per 10% change. The overheated CPI expectations could be a source of inflationary risks, and, thus, serve as indicator for monetary policy tightening.

The Central Bank of Russia responded pronouncedly to the rising CPI with a 50bp key rate hike to 5.00% at the MPC meeting last month, i.e. on April 23. They paid substantial attention to inflationary risks, which are rising against the backdrop of stronger demand side. Consequently, the CBR increased its CPI forecast range to 4.7-5.2% yoy for the year-end of 2021. We expect that in the upcoming months, the yoy CPI figure could be pushed upwards (up to 5.7% yoy) by the low base effect of 2020 — in May and June that year demand was adapting to the new reality of Covid-19 restrictions.

Leveling off is expected only in H2 2021 (we expect 4.9% yey at year-end 2021) due to (1) tightening monetary policy, (2) supply-demand balance revival backed by global economy recovery. The next MPC meeting will take place on June 11, leaving a rather long time span to assess the impact of recent hikes (75bps from the start of the year) on the economy. Anyway, we expect further intra-year hikes with the key rate moving towards the upper bound of the neutral range (5.75%) this year.