Russia Inflation Monitor - Inflation Set to End Year Below CBR Forecast

As headline CPI inflation has declined below the CBR's 4% target and will likely remain close to 3% through next year - and also taking into account that the key rate has moved inside the estimated inflation-neutral corridor of 6-7% - the CBR has started paying more attention to core inflation to detect changes in price trends. In this note, we look at the inflation gauges in the bank's toolbox and conclude that core inflation did not change much in October-November, which supports our view of a CBR rate cut tomorrow.> Modified core inflation flat in November. An important indicator for the CBR is what is called modified core inflation, which is seasonally adjusted and stripped of the most volatile components and also of one-off outliers. This measure better reflects monetary inflation. Our estimates show that in October-November, this figure remained basically flat at 0.2% m-o-m (corresponding to 2.2% in annualized terms). The recent rise in the headline monthly CPI figure, meanwhile, is attributable mostly to seasonal factors, including higher food prices. > Average daily inflation in December points to 3% year-end CPI inflation. Weekly inflation and average daily inflation are important "quick" indicators of price dynamics and can usually reliably help estimate headline monthly inflation. The latest statistics showed that prices were up by 0.1% over the first nine days of December (average daily inflation was 0.01%). If we extrapolate this over the rest of the month, we get 0.3% monthly inflation, which means that annual inflation should be 3.0-3.1%, depending on rounding. This is below the lower boundary of the CBR's official 3.2-3.7% forecast range.> Inflation expectations generally declining, but still elevated for population. Another important gauge for the CBR is inflation expectations, which are measured among businesses, professional analysis and the population at large. The first two groups responded rather quickly to the recent disinflation, but ordinary Russians continue to show much stickier expectations, far above the official target and current actual inflation. That said, they also were on the downtrend this year, hitting their lowest level of the year in November at 8.3%.