Russia Inflation Monitor - Government Acts to Curtail Price Growth

Headline inflation accelerated to 4.4% y-o-y in November, while core inflation reached 3.9% y-o-y. The rise in recent months has been caused by several factors, including a weakening of the ruble and higher food prices. In order to combat food inflation, the government has introduced caps on retail and wholesale sugar and sunflower oil prices (until end-1Q21), as well as export quotas for wheat (until end-June 2021). It is likely that y-o-y inflation is close to its peak and will start to decelerate next year, when the temporary factors fade away. However, until this starts to happen, we think the CBR will be reluctant to cut rates. We expect the key rate to be left on hold at Friday's meeting. > Headline inflation accelerates further in November, reaching 4.4% y-o-y. Consumer prices added 0.7% m-o-m, compared with 0.4% m-o-m growth the month before. This pushed the y-o-y figure up to 4.4% from 4.0% in October. Core inflation (which strips out fruits and vegetables, gasoline and regulated prices) rose to 0.50% m-o-m, up from 0.46% in October, causing the y-o-y figure to climb to 3.9% from 3.6%. Modified core inflation (stripped of the 15% representing the most volatile components) also accelerated to 0.35%, from 0.30% the month before, thus exceeding 4% in annualized terms (4.3% in November up from 3.6% in October).> Government caps prices on sugar and sunflower oil. The government is concerned about the rapid rise of sugar prices (up 73% YTD) and sunflower oil prices (up 26% YTD), which is due to an increase in prices globally, the weaker ruble and the bad domestic harvest. The government has reached an agreement with producers, wholesale traders and retail stores to cap shelf prices for these goods until the end of 1Q21. If producers and retailers fail to adhere to the caps, the government is threatening to impose export tariffs on these goods. Moreover, in order to stabilize flour and bread prices, export quotas have been instituted for wheat, rye, barley and corn (of 17.5 mln tonnes, with a 50% tariff on export volumes exceeding the quota). This will be in effect from February 15 until June 30, 2021.> Seasonal factors, harvest also at play. Among the 15 goods that have shown the most significant y-o-y price growth, 13 are fruits, vegetables and cereals. While their combined weight in the total consumer basket is just 3.7%, their price increase added almost 1 pp to headline inflation. The higher price growth of these goods was a result of several factors, including the weaker ruble (apples, citrus fruits and certain other fruits are usually imported during this time of year), as well as the bad domestic harvest, which resulted in lower domestic production (sugar and sunflowers). In some cases (such as with sugar), prices returned to more normal levels after being abnormally low last year. The weaker ruble is also important not only for imported goods, but also for exports. As prices in external markets rise in ruble terms (due to the weaker ruble) producers tend to increase exports. But this creates shortages in the local market, thereby pushing domestic prices higher. The export tariffs for certain cereals, as well as the price caps on sugar and sunflower oil, will likely ease pressure on domestic prices. > Inflation expectations continue to rise in November. Household inflation expectations in the next 12 months reached 10.1% in November, the highest level since last February (though the survey was not conducted between April and July due to the pandemic). A weaker ruble and higher food prices are traditionally important factors that drive household inflation expectations upward (as they tend to be largely backward looking). The inflation expectations of businesses and market analysts (as represented by the Bloomberg consensus) also picked up in November. However, while analysts have raised their forecasts for this year (average at 4.25%), next year's forecasts have remained largely unchanged at 3.6%. > Weekly inflation remains elevated. After a brief deceleration in late November, weekly inflation returned to 0.2% during the first two weeks of December. Average daily inflation also accelerated, climbing to 0.030% from 0.020%. The most significant price growth was registered in fruits and vegetables, sunflower oil and eggs. However, the government measures should help to stabilize sugar and sunflower oil prices.> Inflation in y-o-y terms should peak soon. The inflationary effects from the weaker ruble and higher food prices should start to wear off soon, though y-o-y inflation will climb further in December, as price growth will likely exceed the 0.4% m-o-m pace registered last December. We see y-o-y inflation exceeding 4.5% at the end of the month, but we expect it to slow to 3.2% by the end of 2021. However, y-o-y inflation has already surpassed the CBR's target of 4% and is above the upper boundary of its inflation forecast for this year (3.9-4.3%). As a result, we think the CBR will leave the rate unchanged at Friday's meeting. However, because the current acceleration is temporary and mostly caused by the weakening ruble (the regulator estimates the effect on inflation at around 1 pp) and the unfavorable harvest, price growth should start to slow as the effect from these factors fades away (the ruble started to strengthen in November). This means that the potential for a key rate cut still exists next year.