The acceleration of the Consumer Purchasing Index (CPI) in Russia from 3.4% year on year in September to 3.5% YoY in October was more modest than analysts at ING Group expected, the financial institution said in its latest report.
“The key reason for the positive surprise was the 0.5% YoY drop in the price of fruits and vegetables (4% of the consumer basket) in October after a 3.4% YoY spike in the preceding month, which is most likely related to this year’s shifted seasonality. Excluding this volatile item, food price growth accelerated by 0.6 percentage points to 3.1% YoY, non-food price growth edged up by 0.1 pp to 4.1% YoY, and services accelerated by 0.2 pp to 4.0% YoY,” the report says.
According to ING, the small positive surprise in October doesn’t cancel out the general upward CPI trend, prompted by the low base effect in the food segment, the 13% year-to-date depreciation of the rouble, and the upcoming hike in the VAT rate from 18% to 20% in 2019.
“Nevertheless, combined with the government’s recent agreement with the oil sector to freeze the local gasoline prices until the end of March 2019, weakening GDP growth trend, and the improvement in households’ inflationary expectations, it suggests actual CPI is unlikely to overshoot the central bank’s 3.8-4.2% threshold at the end of the year and 6.0% in 1H19,” ING says.
At the same time, the analysts’ mid-term outlook on the rouble, CPI and the key rate is made under the assumption of external status quo which cannot be guaranteed at the moment, the report specified.
“In general, portfolio capital flows into emerging markets and into Russia specifically, which seem to determine the rouble’s movements year-to-date, could potentially be negatively affected by any escalation in the U.S.-Russia and/or U.S.-China tensions. The U.S. mid-term elections should be considered as the near-term watch factor, as according to our global strategists, a possible loss of Republican majority in the House could trigger a more hawkish U.S. stance on the foreign policy,” ING added.