Russian data supports the central bank’s hawkish bias

Russian headline CPI accelerated from 8.39% year-on-year in December 2021 to 8.73% YoY in January 2022 (Figure 1), which is 0.2 percentage points below the consensus forecast and our expectations. That's the only good news so far. Going beyond the headlines:

• Core CPI at 9.24% YoY exceeded the headline number, for the third month in a row (Figure 2).
• The structure of headline CPI growth (Figure 3) shows that the acceleration in January was broad-based, with a 0.3 percentage point increase in the annual rate evenly split between food, non-food products, and services.
• The slight uptick in local food prices was supported by global agro commodity prices which resumed growth in January.
• Weekly CPI data points at a further acceleration, to 8.8% YoY as of 4 February. Granted, the seasonal spike in tourist services costs was the key contributor to this acceleration, but the food and non-food product segments also showed an uptick.

Overall, the January CPI numbers somewhat lower the risk of CPI reaching or breaking out of the 9.0-9.5% YoY range, but the underlying structure suggests near-term CPI risks remain elevated in Russia.

Russian retail trade picked up from 3.1% YoY in November to 5.4% YoY in December, exceeding the 3.5% YoY consensus on the faster consumption of non-food products. As a result, full-year retail trade increased 7.3% YoY in 2021, exceeding the pre-Covid levels by 3.9%. The consumer demand fundamentals behind this appear to be strong, at least for the near term:

• Despite a material acceleration in CPI over 2021, real disposable income increased by 3.1% YoY last year, exceeding the pre-Covid levels by 1%. Salary growth totalling 2.8% YoY in the year to November (driven by manufacturing, construction, and trade sectors) was only one of the contributors, while real pensions were up 4.1% YoY.
• While the unemployment level remained at 4.3% in December, the number of employed continued to increase, reaching 72.5 mln, the highest level since November 2019. (Figure 5)
• In addition to income, consumption seems to be supported by an increasing reliance on leverage, as retail lending growth continued to accelerate, reaching 25% YoY in 2021, up from 14% YoY in 2020. Meanwhile, retail deposit growth (adjusted for FX revaluation) picked up from 4% to 6% only. That suggests that the savings rate most likely declined last year.

Corporate activity also exceeded expectations, with December industrial output up 6.1% YoY (+5.3% for 2021) thanks to strong local manufacturing output, while construction growth posted an 8.4% YoY increase in December (+6.0% YoY for 2021) even though housing construction posted a decline. The expansion in local producer activity took place amid a gradual pick up in local corporate lending (Figure 7), suggesting this was broad-based. We also do not exclude that the year-end activity received a boost from the state sector, as federal budget spending jumped 24% YoY in December after 5% YoY growth in the year to November, as the government postponed 19.5% of the annual spending plan until the last month of the year.

The December activity data suggests that the near-term trends are supportive. Nevertheless, we maintain our expectations of GDP growth decelerating from the just reported 4.6% in 2021 to 2.0-2.5% YoY in 2022 on the reduced scope for a post-Covid recovery amid a likely deceleration in lending growth.