Russian CPI: Reversal incoming

Russian CPI growth decelerated from 2.4% year-on-year in January to 2.3% YoY in February, in line with our expectations, but 0.1 percentage point (ppt) higher than the consensus. This is the first case of monthly CPI outperforming market expectations since December 2018, when inflation was accelerating ahead of the VAT hike. Subtle upward price pressure has been seen in the services and food product segments so far, but may soon be joined by the non-food products as well.

• The most obvious area of upward price pressure is in services (27% of consumer basket), which accelerated from 2.8% YoY in January to 3.0% YoY in February (see Figure 1) due to increased public transportation tariffs and mobile network charges. We note that foreign tourism price growth did not accelerate, as the 7% USD/RUB depreciation in the first two months of the year has not yet translated into final prices and might have been constrained by the apparent drop in demand for foreign travel. Prices for medical services also did not accelerate, however this will be a sector to watch given the spread of the coronavirus outside China.
• Price growth in the food segment (38% of consumer basket) continued to decelerate - from 2.0% YoY in January to 1.8% YoY in February - however this slowdown is not as deep as suggested by the higher base effect (c.0.4 ppt) caused by the upward price pressure seen in February 2019 after the VAT hike. The subtle increase in the upward price pressure may be caused by a recovery in global agro prices, to which Russia is sensitive. Global wheat prices posted 16% YoY price growth in USD terms (18% YoY up in RUB terms) in February after a more or less flat 2019 performance (see Figure 2). Historically, each 10 ppt of global wheat price growth in RUB terms translated into 1 ppt of Russian food price inflation, eventually adding 0.4 ppt to the overall CPI growth.
• Non-food products (35% of consumer basket) continued to show a disinflationary trend, with price growth decelerating from 2.5% YoY in January to 2.3% YoY in February in all key components except a minor 0.2 ppt pick-up in gasoline price growth to 1.6% YoY in February. Going forward, the key sectors to watch will be import-dependent household appliances, consumer electronics, pharmaceuticals and clothing, which are the main conduits of the FX pass-through effect on the consumer side. Meanwhile, the recent acceleration of public spending to 53% YoY in January suggests that budget policy is unlikely to be as strong a disinflationary factor as it used to be last year.