Russian inflation keeps accelerating on the back of a combination of cost, demand and technical factors. While we continue to see 2021 CPI risks as limited, the upward price pressure is likely to persist in the near term due to grain price growth and RUB depreciation.

This should add to the list of uncertainties calling for central bank caution this month.

Russian CPI growth accelerated from 3.6% year on year in August to 3.7% y/y in September, which is in line with the market consensus and our expectations.

The acceleration in the annual rate vs. August is largely technical: there still was a 0.1% month-on-month deflation this September, justified by the seasonality, but it was just smaller than the abnormally wide deflation seen last year. Combined with the prevailing market focus on foreign politics and the FX market, the importance of inflation readings for now may seem low. However, there are still several observations worth mentioning in our view.

Weekly CPI data suggest that deflation is nearly over. In fact, the entire 0.1% m/m deflation was assured by the second week of September, while in the other weeks consumer prices were flat.

Looking at the annual CPI composition, it appears that the upward price pressure is uneven among segments, with non-food CPI taking the lead for the second month in row. The key items posting above-average acceleration include consumer electronics and construction materials, which we take as a reaction to continued ruble depreciation vs. $ (by 8%) and € (by 12%) since mid-year, as well as demand on real estate supported by the subsidised mortgage programme, which will probably be extended for the next year.

The local food CPI is experiencing upward pressure from growth in global wheat prices, which were up 17-22% y/y in $ terms and 37-40% y/y in ruble terms in the last two months. This is a factor that is likely to prevent the food CPI from posting material disinflation in the coming months.

Acceleration in the CPI has minimised the ex-post real key rate to around 0.6%, a five-year low. Given the persistent expectations of disinflation in 2021, the ex-ante real rate is higher – at around 1%, but still below the historical highs. Although the active phase of CPI acceleration this year is likely nearly over, our year-end expectations of 3.7% y/y are facing upward risks due to additional pressure from cost inputs and demand drivers. Near-term CPI pressures combined with mounting foreign policy uncertainties and market volatility add up to an easy call for an unchanged key rate at the upcoming Central Bank of Russia (CBR) meeting on 23 October.

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Dmitri Dolgin is the chief economist, Russia, at ING in Moscow. This note first appeared on ING’s “Think” portal here.

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