Russian inflation unexpectedly accelerates in June, CBR unlikely to lower rates in July

Russian inflation surprised negatively in June by accelerated to 4.4 percent year-on-year from May’s 4.1 percent, deviating from a 4 percent target fixed by the Central Bank of Russian for the end of 2017. This is the first time Russian inflation accelerated since June 2016. As the rise in headline inflation was mainly driven by increasing prices of food and vegetables, core inflation carried on with its downward path declining to a new historical minimum of 3.5 percent.

There are several reasons for the acceleration of headline inflation. The unusually cold weather stands in the way of a seasonal fruit and vegetable price reduction normally seen in summer in Russia. It remains to be seen whether the deflationary movement would just come later in this year or will disappear totally, noted Nordea Bank. The Russian ruble has depreciated by 4.5 percent against the U.S. dollar in June, exerting additional upward pressure on prices.

Given the increasing short-term inflationary pressures, the likelihood of another key rate cut on 28th of July is greatly lowered, stated Nordea Bank. In 2016, inflation also accelerated a bit in June due to similar factors that kept the CBR from lower the rate.

The main issue for now is the degree to which inflation expectations that remain persistently high would react to this seasonal inflation movement. Other medium-term inflation risks on the central bank radar are rising real wages, oil price uncertainty, rebounding consumer demand and lending activity.

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