Headline CPI was up sharply to 11.4% YoY in December, amid a rising pass-through from RUB depreciation. The latter’s sharper and more front-loaded pattern suggests that the upsurge in exchange rate volatility might have fuelled depreciation/inflation expectations, if only temporarily. We expect the pass-through from a weaker RUB to push the CPI still higher in 1Q15, before a disinflationary cyclical impulse brings a trend reversal into 2H15. Upside risks to the short-term inflation outlook, along with the slide in oil prices, are likely to delay the gradual reversal of recent policy tightening, we believe.
Food inflation picked up further to 15.4% YoY (from 12.6%), contributing almost half (110bp) of the acceleration in headline CPI. However, as in November, the price growth on embargo-affected products can explain two thirds of the pick-up in food inflation, with the greater and more broad-based magnitude of the acceleration pointing to a rising contribution from RUB depreciation.
Core inflation: FX pass-through accelerates... Inflationary pressures across core categories rose sharply, with our set of core CPI measures up to 8.7% YoY (from 6.2% in November), while the sequential run rate (i.e. MoM SAAR) spiked to 39.4% (vs. 8.9%), a pace last seen in 1999. The FX pass-through was the main factor, as seen in the disproportionate price growth for import-intensive categories: outbound tourism (17.5% MoM), consumer electronics (14% MoM), household appliances (12% MoM) and PCs (8.9%), etc.
... amid destabilised depreciation/inflation expectations. The unprecedented sharpness and acute front-loaded pattern of the FX pass-through imply that the extreme exchange rate volatility might have had a significant effect on depreciation/inflation expectations. This supposition is supported by anecdotal evidence that in December households were changing their RUB savings (deposit outflows) into real assets (consumer durables, housing) and hard currency.
Inflation to spike through 1Q15. We expect the pass-through from a weaker RUB to push the CPI still higher (to a peak of 13-14% in 1Q15) before the disinflationary cyclical impulse starts to reverse the trend into 2H15. The latter (disinflation) is conditional on the recent spike in inflation expectations not generating longer lasting second-round effects, i.e. a pickup in wage growth. We think this is unlikely, given employees' weak bargaining power in the private sector and modest intentions for wage indexation in the public sector.