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CPI - January; FX pass-through surprise on the upside

 
09.02.2015

On Friday, we published CPI - January; FX pass-through surprise on the upside. Excerpts from the front page are given below.

Headline CPI soared to 15% YoY in January, surprising the market by a wide margin. The impact from RUB depreciation was the main driver and it looks that both i) the path of the FX pass-through is more front-loaded and ii) its magnitude is larger than expected. In light of the latter, we now expect CPI to peak around 17% in March-April, before moderating to 11% by the year-end. Given the uncertainty related to the magnitude of the FX pass-through, we see upside risks to these forecasts. We believe the CBR is likely to take a pause over the next couple of months to reassess its inflation and policy outlook.

Broad-based spike in inflation. The inflation surge in January was broad-based across different categories, with food (up 20.7% YoY) and particularly fruits & vegetables (40.7%) seeing the largest price gains. Core inflation (ex-food, energy and regulated) spiked to 12.0% YoY (from 8.7%) while its sequential trend remained extremely high at 45% (MoM SAAR). The FX pass-through was the main factor, as seen in the disproportionate price growth for import-intensive categories, but large price gains for market services also suggest that the impact of the pass-through is broadening.

Both more front-loaded and larger FX pass-through. As we noted have previously, one of the main questions raised by December's spike in the CPI was whether it is a product of a i) larger or ii) more front-loaded path of the pass-through from RUB weakness. January's print exceeded that which is implied by our 'front-loaded' model, suggesting that the magnitude of the pass-through might also have been affected. Applying a normal path (i.e. not front-loaded) to the latest CPI prints suggests that the magnitude of the FX pass-through increased to 1.75x (each 10% depreciation adds 1.75% to CPI) from 1.3x back in the 2008-09 episode.

Revising our CPI forecasts. We now run on the assumption that the FX pass-through will amount to 1.6x (vs. 1.3x previously), which pushes the peak of the CPI to around 17% in March-April. A larger FX pass-through also increases the risk of less benign second-round effects (i.e. wage inflation). However, unless the policy mix is eased substantially, wage inflation is likely to be contained. Therefore, we expect the CPI to fall back quickly in 2H14 towards 11% by the end of the year. In light of the uncertainty related to the magnitude of the pass-through and potential response from the policy-makers, we see upside risks to the new forecasts.

CBR to take a pause. January's upsurge in inflation probably came as a large surprise for the policy makers. Therefore, the CBR is likely to take a pause to reassess the dynamics of the FX pass-through and its implications for the policy stance. Should the run rate of inflation normalise by March (as we expect), the regulator might consider continuing rate cuts in summer. Alternatively, should the inflation run rate continue to surprise on the upside or we see some evidence of second-round effects, the CBR is likely to lift rates back up to stabilise expectations. Higher and more persistent inflation would also increase the risk of back-door easing via subsidised refinancing facilities.

Vladimir Kolychev
VTB Capital analysts

Tags:
CPI, Russia, inflation

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