Russia's July inflation rises due to utility price adjustments

Russia inflation accelerated to 15.6% y/y in July from 15.3% in June, slightly above consensus and our forecast. Utility prices are now normally adjusted in July. Because of the RUB sell-off over the past year and the concomitant acceleration in inflation, the utility adjustment was more than double this year at 7.1% versus 2.8% last year. The higher rise in utility prices increased headline inflation by 0.4 pp this month as services inflation rose to 13.4% y/y, the peak so far. Otherwise, food inflation decelerated slightly to 18.6% y/y, well below the peak of 23.3% in February. Other goods inflation increased slightly to 14.3% y/y, representing the current peak. This is because gasoline prices rose 2.5% m/m in July.

"Overall, we have been predicting that inflation will decline to about 12% y/y at end-2015 because of favorable base effects that will become important over the upcoming year. In Q4 15 these effects begin to help lower inflation, then peak in Q1 16 and run out by Q2 16", notes Barclays.

The forecast is complicated by the recent sell-off of the RUB to 63/USD, representing depreciation of some 20% This offsets a large portion of the RUB appreciation during February-April this year as the RUB has closely followed changes in global oil prices throughout. When the exchange rate fluctuates like this, the pass-through is particularly uncertain. Thus if the RUB were to sustain its depreciation trend, it would likely cause inflation to increase. However, if the RUB stabilizes or appreciates from here, it might have little impact on inflation. This all depends on the path of global oil prices.

Last Friday's CBR decision to cut the key rate by 50bp to 11.0% clearly added to the vulnerability of the RUB and looks increasingly like a mistake. However, there does not appear to be overshooting yet and if the oil price and the RUB appreciate from here, the impact on inflation will be moderate. That being said, if oil prices remain at low levels, it is believed, there is greater scope for the RUB to depreciate from current levels (eg, a further 5-10% depreciation of the RUB is needed to bring Brent in RUB terms back to levels prevalent in May-June 2015).

"We think the CBR may attempt to smooth these FX moves and avoid overshooting by tightening monetary conditions either by offering more in FX swaps or decreasing liquidity in its RUB auctions", says Barclays.