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CPI – February; past the peak of the inflationary impulse


Headline CPI increased to 16.7% YoY, but the sequential run rate slowed to 1.9% MoM SA from its peak of 3.4% in January. Although there is still some evidence of a pent-up FX pass-through, we expect it to dissipate quickly and disinflation to gather pace afterwards, with the CPI dropping to 11.0% by the year-end. Policy-wise, the report is somewhat dovish and, in light of other evidence and policy signals, increases the chances of a more front-loaded reversal of emergency tightening.

The headline figure continues its march towards the peak, as inflation edged higher in February to 16.7% YoY. The upward trend was shared across the categories, with food (23.3% YoY) contributing more than any other single product group on the back of the sizable growth in the prices of grains and beans (51.5%) and fruits and vegetables (43.5%).

Deferred inflation and second round effects continue to represent the upside to the forecast. There is still some anecdotal evidence of a pent-up pass-through from FX into retail prices, as suggested, for instance, in the hike in AvtoVAZ’s car prices. This needs to be monitored carefully in the coming weeks, as a materially larger FX pass-through might not solely push up the CPI trajectory for this year, but also increase the risks of less benign second-round effects (a spillover into wage inflation).

That said, the February print provides strong evidence that we are past the peak of the run rate of inflation, as it slowed to 1.9% MoM SA from 3.4% at the peak in January. The moderation is evident across the board, with consumer electronics slowing to 2.2% MoM (from 6.1% in January) as demand plunges and the adjustment in some of the volatile food items comes to an end, with granulated sugar showing 1.2% (vs. 19.1%) and fruits and vegetables 7.2% (vs. 22.1%). The broad-based nature of the moderation provides grounds to believe that the magnitude of the potentially deferred inflationary impulse is not particularly large and is likely to run its course quickly.

The chances of a more front-loaded policy normalisation are rising. Recent data has seen some further evidence of stabilisation (a decline in the WoW CPI run rate, RUB appreciation, stabilisation/growth in retail deposits, a further moderation in wages growth) while the risks to financial stability from a protracted credit crunch are on the rise. This, along with the recent policy signals from the fiscal (anti-inflationary amendments to the budget) and monetary authorities, increases the chances for a more front-loaded trajectory of the interest rate policy normalisation then we previously thought.

Vladimir Kolychev, Alexander Isakov
VTB Capital analysts


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