WOOD Flash – Russia macro: monthly inflation growth outpaces base effects

Inflation in Russia in May increased to 6.0%, following a 5.5% increase in the previous month, and faster than both the consensus and our expectations. There are three main takes on this. First, monthly inflation jumped back to 0.74% mom, after two consecutive months of declines, suggesting that a stabilisation in inflationary pressure, which we had expected after the last two months of data, is not here yet. Second, inflation expectations, after a decline at the beginning of the year, has already outpaced the 2020 highs, signalling that further upside surprises are possible. Third, this will reinforce the current trends in macro policy. Regarding the CBR’s stance, even though the geopolitical environment has not deteriorated, to be coherent with its earlier messages, the CBR will have to hike again this month, with the risks skewed towards a 50bps hike (we include a table using the CBR’s medium-term policy rate forecast at the end of this flash note). On the fiscal policy front, in May, Deputy Finance Minister Kolychev noted the overheating in the Russian economy, suggesting higher-than-expected growth, something we have been flagging since the beginning of the year, with our above-consensus GDP growth estimate of 4.0%. More recently, this issue was raised again by Finance Minister Anton Siluanov, during the Saint Petersburg economic forum, as he stated that earlier budget policy normalisation will be considered. Going forward, we have revised our average inflation estimates upwards, to 5.5% (from 5.3%) for 2021E and to 4.2% in 2022E, from 3.8%, on average.