The first signs of a pick-up in food prices (ex-fruit and vegetables) might be partly attributable to the problems with this year’s harvest. This could well continue in the coming months, while fruit and vegetables prices are likely to stop rising as soon as the new harvest hits the shelves. However, the usual seasonal deflation for vegetables is likely to be much milder than last year’s, pushing YoY growth rates higher.
As for July, we are narrowing our forecast to its upper bound, i.e. 1.3% MoM and 5.7% YoY (from 1.2-1.3% MoM and 5.5-5.7% YoY). Given local and US harvest pitfalls, and the pass-through effect from a weaker RUB (recent amendments to the CBR’s intervention mechanism increase the downside risks for RUB) as well as strong internal demand and lending growth, we are reiterating our full-2012 CPI forecast at 7.3% YoY. We expect no change in monetary policy in August (the next CBR’s policy meeting is scheduled for early next month), although following the recent interview by CBR Deputy Chairman Alexey Ulyukaev and CPI coming closer to the CBR’s threshold of 6.0% YoY, the chances of the regulator acting already in August are growing. Our base case implies a 50bp hike in key rates this year (by 25bp in September and October).