Russian CPI: A priced-in slowdown

Russian CPI continued to decelerate, reaching 3.8% YoY in October (vs. 4.0% YoY in September), in line with expectations. As in September, the slowdown was observed in all key segments.

• Food (c.38% of the CPI basket) was the main contributor to the overall slowdown, with the price growth rate declining from 4.6% YoY to 4.2% YoY on base effects and lack of pro-inflationary pressure from global agriculture prices.
• Non-food products (c.35% of the basket) showed a subtle deceleration from 3.4% YoY to 3.2% YoY, mostly thanks to deceleration of price growth for consumer electronics (RUB FX rate-driven) and gasoline.
• Services price growth slowed from 4.0% YoY to 3.8% YoY on a broad range of items.

The CPI performance observed in October suggests a likely further deceleration to 3.4% YoY by year-end 2019 and 2.5% YoY in 1Q20. This represent a 0.3-0.5 percentage point downgrade in our previous expectations, as in addition to the high base effect we see a higher impact of demand-driven constraints following signs that Russian households are returning back to a savings mode as seen from the macro statistics for August and September.

It is highly likely that 1Q20 will see the lowest intra-year CPI reading in 2020, as later into the year some of the disinflationary factors worth up to 2.0ppt will be phased out.

• The high base effect created by the VAT hike will peak at around 1.5ppt in 1Q20, after which it will gradually decline.
• The disinflationary effect of budget underspending seen this year, according the the recently released note by the Bank of Russia's research department, totals up to 0.5ppt in the current CPI growth rate. Provided the government puts spending back on track, 2020 CPI will catch up.

We also remind, that this year's CPI trend is favourably affected by the harvest-driven stabilization in global agriculture prices following the sharp spike in 2018. According to our estimates, the deceleration in global wheat price growth from 40% YoY (in ruble terms) in 2018 to around zero in 2019 had a positive effect on local CPI growth in the amount of 1.6ppt. That said, it seems that the global agriculture price expectations remain stable, which combined with continued growth in Russia's local production of key meat, grain, and other agricultural products, also mentioned in the Bank of Russia research report, suggest limited pro-inflationary risks from the agricultural sector for 2020.

As a result, accounting for the combination of pro-inflationary and disinflationary factors, we see CPI returning to 3.7% YoY by year-end 2020. The balance of risks to that view is skewed to the downside, especially if local budget spending and consumer demand fail to pick up as expected.