Russia Inflation Monitor - Weaker Ruble Pushes Inflation Higher

Headline inflation accelerated to 3.6% in August from 3.4% in July. Core inflation and our modified core inflation estimate picked up too, though both remained below 4% in annualized terms. The ruble weakened nearly 8% in July-August versus a weighted basket of currencies of Russia's main trading partners, which was probably one of the main reasons for the slight rise in inflation. The ruble's weakness has also resulted in an increase in inflation expectations for this year and reduced the chances of a CBR rate cut in September.> Prices remained flat m-o-m in August compared with 0.2% deflation a year earlier, pushing y-o-y inflation to 3.6%. Year-over-year inflation picked up in all three categories in August: food (to 4.3% from 4.2%), services (to 2.7% from 2.5%) and non-food items (to 3.4% from 3.1%). Official core inflation (which strips out prices of fruits and vegetables, as well as regulated utility and transportation tariffs) and modified core inflation (our estimate, calculated by stripping out 15% of the most volatile items) both accelerated - from 0.26% to 0.32% and from 0.28% to 0.32%, respectively - but remained below 4% in annualized terms (3.9% for modified core inflation, up from 3.5% in July and 3.8% in June). > Headline y-o-y inflation could further accelerate in September. The weekly figures show that prices remained flat during the first week of September, mostly thanks to continued disinflation in the fruits and vegetables category (prices fell 3.1% over the week). However, taking into account the 0.2% m-o-m deflation in September 2019, it is likely that y-o-y inflation will accelerate further. Given the divergence seen in August between the accumulated weekly and the final monthly figures (deflation of 0.1% and zero growth, respectively), the weekly data may be underestimating non-food inflation due to methodological differences (weekly inflation is based on a narrower set of goods and services and has a larger share of food items than the monthly figures). > Inflation expectations have increased in September, driven by the weaker ruble. The CBR has resumed its usual polling of the population to gauge its inflation expectations. In August, respondents expected prices to rise 8.8% over the next 12 months, while they had expected a 7.9% increase in March, the last time such polling was conducted. It is impossible to say whether expectations increased or decreased versus July due to the gap in polling data. Polls conducted via telephone and over the internet, which are incomparable due to the different methodology, showed that the share of respondents expecting inflation to accelerate in the next 12 months was above 60% in July. Meanwhile, Bloomberg's surveying of market analysts has shown an increase in the average inflation forecast for 2020; after dropping to 3.7% in June-August, the average forecast rose to 4% in early September. This likely owed largely to the ruble's recent depreciation. The average forecast for 2021 has remained flat at 3.5%, probably reflecting anticipation of continued economic weakness. > CBR could pause its rate-cutting in September. CBR officials have recently indicated that the central bank still sees some room for monetary easing but that it will need to assess the size and timing of possible future cuts at its next monetary policy meeting, which is on Friday. Taking into account the increased volatility in the ruble and the persisting geopolitical risks, there is a good chance that the CBR will opt to not cut rates this time around and instead wait for a clearer picture to emerge, leaving the door open for a cut in October or December. Since inflation should remain below the CBR's 4% target this year and close to or below the lower boundary of its inflation forecast for next year (3.5-4.0%), another 25 bp cut is still likely this year, assuming the ruble does not fall further. According to the CBR's expectations, interest rates could start to be raised in 2022, with the key rate returning to the estimated neutral level of 5% by the end of 2023.