Inflation in Russia accelerates by year-end

Global agriculture inflation, the ruble’s depreciation and low base effect pushed Russia’s consumer prices above expectations at the end of 2020. Although most of these factors are temporary, inflationary expectations are rising rapidly.

Russia’s consumer price index (CPI) exceeded expectations in 2020 despite weakness in demand, reports ING Think. In December, CPI increased to 4,9% from 4,4% registered in the previous month confirming preliminary estimates. The figure is at the upper bound of the Central Bank’s forecast range of 4,6-4,9% year on year made public on 18 December.

In February 2020, inflation in Russia was at its lowest point of 2,3% year on year. Since then, it has risen more than twofold due to a number of factors. Significant depreciation of the ruble against the dollar during 2020 was one of those factors. Analysts expect the inflationary effect of the ruble’s depreciation to be minimised after the first quarter of 2021. Global agriculture inflation was another reason, as global wheat prices surged by around 25% year on year in USD terms and around 50% in ruble terms in August-September. The good news is that global food prices seem to have slowed in the last quarter of 2020, and the global outlook for 2021 is currently good.

The scale of the inflation pick-up keeps exceeding expectations, warns ING Think pointing out that higher-than-expected CPI means a lack of disinflationary effect of weak demand. Although food inflation became the primary contributor to the overall increase, non-food products inflation also rose from 3,1% to 4,8% year on year. All non-food items except apparel showed acceleration in price growth throughout 2020, including those independent of imports (construction materials, gasoline). Meanwhile, the services sector showed a 1,1% disinflation in 2020, but its relatively low weight prevented it from influencing the overall picture.

The analysts also consider that expected increases of state pensions in February and state sector salaries in October, as well as possible additional social support ahead of September’s parliamentary elections, are likely to bring a recovery in consumption, which may be pro-inflationary. Inflationary expectations may become a cause of concern for the Bank of Russia and require a more cautious approach to inflation targeting in the coming months.

The lack of disinflation from the demand side may result in higher-than-expected inflation in 2021. Expectations of one last cut in the Central Bank’s key rate in April are also becoming optimistic.

By Anna Litvina

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