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CPI returning to normal levels

CPI up 1.2% MoM in July, YoY growth is 5.6% vs. 4.3% in June. The final reading was slightly below our expectations (5.7%), but there was nevertheless a significant jump in the headline figure. The growth in food prices jumped to 5.5% YoY, from 3.6% in June and services rose to 5.9% from 3.8%, while non-food prices remained stable at 5.4% YoY.

The jump in headline CPI was mainly driven by two technical factors: i) the postponed hike of regulated tariffs and ii) the elimination of the high-base effect in food prices. These factors suppressed the headline figure in 1H12, allowing headline CPI to reach 3.6% in April-May. In July, the direct impact of the tariff hikes added 0.5pp MoM to the YoY headline CPI figure, while the food price factor added 0.7pp. CPI has now almost returned to normal levels (we expect it to do so in August-September).

Core inflation was stable, with ex-food, gasoline and tariffs CPI increasing from 5.46%YoY in June to 5.50% in July. However, this was the first increase in the YoY growth rate since October 2011, which points to the possibility of a further build-up in underlying inflation pressures later this year.

We maintain our year-end headline CPI forecast of 7.3%, a figure which is well above the CBR’s forecast of 5.0-6.0%.

In our view, the recent CBR hawkishness is reasonable. The Central Bank’s policy needs to be forward-looking (i.e. preventing future inflation growth), and so a change in direction of the underlying inflation trend would trigger a more hawkish stance from the regulator. Moreover, because headline CPI is set to exceed the CBR’s forecast shortly, rate hikes might be used to preserve the CBR’s credibility. Besides that, an increase in regulator tariffs, higher food prices and weaker RUB might trigger an upward shift in inflation expectations – also a reason for more hawkishness from the regulator. In this environment, we maintain our forecast that the CBR is to hike rates 50bp in two 25bp steps in September and October. 

Maxim Oreshkin
VTB Capital analyst

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