Russia's annual consumer price inflation (CPI) in June 2021 accelerated to 6.5% year on year in June 2021, up from 6% y/y seen in May and 5.5% y/y in April, according to the latest data from RosStat, confirming the previous estimates based on weekly data.

As reported by bne IntelliNews, inflation defied expectations and reached 6% in May, while inflationary expectations remain elevated.

Inflation in June heated up further and reached a 5-year high and exceeded consensus market expectations that stood at 6.4% y/y. Core CPI also climbed from 6% y/y in May to 6.5% y/y (0.8% month on month) in June, beating consensus estimates (0.6% m/m and 6.3% y/y respectively).

Food inflation continued to accelerate to 7.9% y/y, beating April’s peak, with fruits and vegetables (11% y/y in June versus 8% y/y in May), as well as meat and poultry (11.5% y/y), fish and seafood (9% y/y) being the main drivers.

Within the non-food segment, the main driver continued to be construction materials (24% y/y in June versus 16% y/y in May), which is likely to maintain pressure on services, where inflation accelerated to 4% y/y in June from 3.3% y/y in May.

"If accounting for base effects, inflationary pressures intensified further in June," Sova Capital commented on July 8.

The re-acceleration of inflation comes from food items due to higher global food prices, with certain categories of the non-food segment (especially, construction materials), and a demand-supply mismatch in travel services reflecting difficulties in tourism due to coronavirus (COVID-19) restrictions, Sova believes.

"Going forward, we do not rule out a further rise in inflation given that not all of the supply chain disruptions were reflected in the non-food segment," Sova analysts warn.

The Bell cites Alfa Capital analysts as warning that inflationary pressures could be further intensified ahead of the parliamentary elections in September, with the possible increase in pre-election social spending by the government and tighter control over food prices.

All these factors could keep inflation ahead of the 2016 highs and reaching 6.7-6.9% y/y in August-September with 2011 CPI at 6.2% y/y, on Sova's estimates. The analysts also remind that the Central Bank of Russia's (CBR) decision is likely to be skewed towards a larger rate hike, with a 25-100bp hike on the table for the July policy board meeting.

The board of the CBR at the policy meeting of June 11 resolved to raise the key interest rate by 50bp to 5.5%, in line with expectations, and gave a clear guidance for further monetary tightening. But the persistebt inflationary pressures have the market anticipating a more aggressive hike in July, possibly by as much as 100bp.

VTB Capital (VTBC) on July 8 argues that June's CPI shock in fruits & vegetables and accommodation services is transitory, whereas price pressures in construction items are to remain persistent.

While VTBC analysts raise the 2021 inflation forecast to 6.2% y/y, they still expect the CPI run rate to gradually decelerate to target-consistent levels by the end of 2021. VTBC expects the CBR to raise the key policy rate to 6.5% by 2021, adding +50bp at the next meeting in July.