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CPI - Headline down to 15.8% YoY in May – key driver remains food disinflation


Inflation continued its downward march in May to reach 15.8% YoY, in line with our estimates and a tick lower than the Bloomberg consensus of 15.9% YoY.

The disinflationary impulse from food items accelerated, with their contribution sliding to -0.6pp, from -0.4pp a month ago, while non-food (+0.1pp) and services (-0.1pp) were roughly unchanged and offset each other. Several factors are holding up non-food prices; we note that new seasonal clothes are priced to match RUB depreciation and the distributors of electronic appliances might be unwilling to alter prices significantly because this is unlikely to generate additional demand from a squeezed consumer. Policy-wise, this print supports a front-loaded disinflation hypothesis and is further evidence that the inflationary impulse is dissipating, thus providing more arguments for further easing at the CBR’s next monetary policy meeting.

Fruit and vegetables, which have a short-shelf life and are mainly imported at this time of the year, set the tone of disinflation in April, contributing as much as -0.3bp to the headline. However, in May the leading role was assumed by other food items, such as sugar and meat, where the YoY growth in prices showed a measurable deceleration to 36.9% and 18.2%, respectively. Discussions have resumed about selectively relaxing the import ban, and that creates the potential for lower food inflation. However, given that such initiatives are still at an early stage, the likelihood of them happening and the effect on our projections is still marginal.

The contribution of non-food items to the change in the headline inflation amounted to 0.1% and was exactly offset by the services contribution. While consumer demand for major components in the non-food category is low, the headline seems to be more persistent, rising to 14.3% YoY (from 14.2% a month earlier). The main bulk of the positive contribution still comes from clothes and footwear, as new batches of clothes better suited for the warmer weather but priced to match new FX levels are replacing the previous stock. In the meantime, anecdotal evidence suggests that the demand for consumer electronics remains depressed, pushing price competition higher in this segment. That is likely to show up in a decline of the non-food headline inflation in the coming months. Services inflation has been propped up by reversal in the momentum of tourism prices, from -5.5% MoM SA in April to 0.4% MoM SA in May.

The current print is in line with the scenario of a front-loaded pass-through effect. The recent volatility in FX notwithstanding, we expect the effects of a weaker demand drag to dominate the temporary effects of RUB weakness, which for durable items have already likely been priced in during the depreciation episode in late 2014 – early 2015. Thus, the two additional declines in monthly headline inflation, from its peak of 16.9% in March to 15.8% in May, as well as further projected disinflation, provide more evidence in favor of further monetary policy easing in mid-June.

Alexander Isakov, Petr Grishin
VTB Capital analysts


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