The first month of 2Q15 brought a decline in headline inflation to 16.4% YoY, with disinflation most pronounced in food prices, although the slowdown was observed across the board. Core inflation remained level at 14.1% YoY. Apart from external shocks, which remain a constant risk to our inflation projections, the risks to our YE15 forecast of 11% YoY are slightly skewed to the downside on contracting internal demand, rouble strength and tighter credit conditions. Policy-wise, this print is dovish and provides more evidence in support of a front-loaded path of exchange rate pass-through. That increases the chances of further interest rate normalisation at the coming monetary policy meeting in June.
Food prices drive disinflation. The headline CPI dropped 50bp to 16.1% YoY, which is consistent with the slowdown in weekly inflation estimates. In terms of components, food prices contributed most to the slowdown of the headline figure, shaving 40bp in April. Looking closer at food items, the fruit & vegetables category experienced the steepest decline in growth rates, from 38% YoY to 30% YoY (which corresponds to a sizable decline of 5.1% MoM). The decline in the seasonally adjusted sequential terms of sugar and eggs prices also helped drive the headline figure lower, however their effect was less pronounced as they have a lower weight in the consumer basket (0.5% each).
Underlying inflation stayed level. VTBC’s measure of core inflation edged slightly lower to 14.1%, from 14.2% YoY in March. The less pronounced decline is due to the domination of food-led disinflation in April. However, we expect that the inherently more persistent non-food inflation (due to longer shelf life and turnover cycles) is posed to catch up with the disinflation trend in the coming months. Rouble strength and a widening output gap are to continue having an increasing drag on core inflation, as the foreign exchange shock subsides.
Risks to inflation forecast have a slight negative skew. The overall tight credit conditions, the waning FX pass-through and demand-pull disinflation are all likely to help to pull the CPI down over the coming months. While the risks of a pent-up price adjustment remain, as indicated by some of the local flare ups in food inflation (including delayed tea price adjustment and limited acceleration of onions prices), their scale is increasingly limited while the adverse second round effects (i.e. public sector-led wage inflation) have failed to manifest themselves.
More room for interest rate normalisation. In terms of policy, the report is dovish as it provides substantial evidence of underlying disinflation. Thus, the combination of further evidence of a cyclical slowdown, including labour market adjustments and contracting internal demand, and the expected decline in the headline inflation in May increase the chances of more interest rate policy normalisation in June.