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CPI – pass-through from import ban and FX intensifies in October

Headline CPI rose to 8.3% YoY in October. The pass-through from import restrictions into food inflation proved less acute than we anticipated last month, while the unexpected increase in regulated tariffs, as well as a pickup in core inflation, were the main drivers. We see headline CPI spiking higher through 1Q15 before it embarks on a tangible disinflation trajectory in 2Q15-1H16, opening up room for policy easing.

Pace of the pass-through from trade restrictions into food inflation eased. Headline CPI picked up to 8.3% YoY in October, a tick lower than expected. The milder pickup in food inflation was the main surprise, as the pass-through from import restrictions eased somewhat last month, particularly across meat categories. However, we think that food inflation is to accelerate and peak in 1Q15, as the pass-through across the fruit & vegetables, fish and dairy categories is not yet complete.

Core inflation: more signs of FX pass-through. Inflationary pressures across the core CPI basket categories continued to build last month, with VTBC’s measure of core inflation edging up to 5.8% in YoY terms (from 5.2-5.4% in the summer) and the sequential run rate (i.e. MoM SAAR) spiking above 7.0% (vs. 5.0%). The FX pass-through was a prominent factor, as seen in the rising pace of price increases across those categories with a large import content. However, there was also sharper price growth across market-based services, which might be a sign of the short-term impact from rising inflation expectations.

Tariff inflation running above government cap. The unexpected price hikes for regulated services was another important driver behind the acceleration in headline CPI last month, with tariff CPI now running above 7.0% in YoY terms (vs. the official commitment to contain it within a 4.5% cap this year).

Inflation to spike through 1Q15 and then drop. The as yet uncompleted pass-through from import restrictions, as well as the impact from RUB devaluation, are set to push headline CPI up towards a peak of 9.5% in 1Q15. We do not think there is cause for concern that such a pace will be sustained thereafter, given the disinflationary medium-term impulse from supply-side shocks on incomes and the rising negative output gap, as seen in the persistent slide in nominal wages growth. Hence, we await tangible disinflation from 2Q15 with headline CPI dropping to 6.0% by the end of 2015 and then to 4.0% by mid-2016, opening room to start an easing cycle by the middle of next year.

Vladimir Kolychev
VTB Capital analyst


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