Russian headline inflation accelerates below expectations in February

Russian inflation pressure continues to be moderate in spite of a VAT hike early in 2019. The better than expected trends give reason to no longer expect any more hikes from the CBR in 2019, noted Nordea Bank in a research report. However, a swift shift to milder rhetoric is unlikely.

On a year-on-year basis, the headline consumer price index rose just 5.2 percent in February from January’s 5 percent. This is slight below consensus expectations of 5.3 percent. Retailers appear to be unwilling to fully pass higher tax burden to consumers. Given the internal demand comparative softness aggressive price changes might well be counterproductive inducing a decline in the market share.

Acceleration of inflation in the recent months is mainly due to increasing food prices. The contribution of food to headline inflation in the month came to 2.2 percentage points rising by 0.2 percentage points since January and explaining the move of the headline inflation to 5.2 percent. Prices in non-food segment and services continued to be comparatively stable. Given that food is mainly subject to a lower VAT rate of 10 percent, which continued to be the same in 2019, the current price swing is more seasonal than VAT-driven.

So far this year, inflation has followed a path that is markedly below the CBR forecast for first quarter of 5.5 percent to 6 percent. Meanwhile, inflation expectations of households and firms appear to have peaked in January, hinting at restricted second-round effects of the VAT hike, which the central bank was most keen to avoid. In February inflation expectations of households fell to 10.1 percent.

“Taken altogether this gives some room for a slightly easier guidance from the CBR at the meeting on March 22. The regulator is likely to revise lower its inflation forecasts from elevated 5.5-6 percent in Q1 and in 5-5.5 percent at year end. We, however, believe that cautious Russian regulator will not yet hint at the possibility of a return to an easing mode earlier than previously announced Q4 2019-early 2020”, stated Nordea Bank.