EMEA Snap:Russia,Inflation surprised on the upside in June
Russian inflation surprised on the upside in June.
Prices increased by 0.6% MoM in June (vs. market expectation of 0.4% MoM), the highest monthly increase in five months. This sharp monthly increase in prices led to a reversal in the downward trend of annual headline inflation, increasing to 4.4% YoY (from 4.1% YoY in May). The increase in YoY inflation was led by increases in both food and services inflation this month. Food inflation increased for the third straight month and reached a 7-month high of 4.8% YoY. Food inflation has increased since April, as the effect of the bumper harvest in 2015-2016 fades and it is expected to trend higher due to (seasonal) supply factors. Inflation in services costs also increased, by 0.2pps to 4.2% YoY with costs of housing utilities and transportation being the two major contributors to inflation in this category. On the other hand, alcoholic beverages, tobacco decreased from 6.7% YoY in May, to 6.2% YoY in Jun; clothing and footwear decreased from 5.3% YoY in May, to 5.1% YoY in Jun; housing, water, electricity, gas and other fuels decreased from 5.0% YoY in May, to 4.9% YoY in Jun; household furnishing, equipment & maintenance decreased from 2.5% YoY in May, to 2.2% YoY in Jun; the health component decreased from 4.0% YoY in May, to 3.3% YoY in Jun (a 69.3ppt decrease). Transport decreased from 4.7% YoY in May, to 4.6% YoY in Jun; the education component decreased from 6.9% YoY in May, to 6.7% YoY in Jun; hotels, restaurants and cafés decreased from 3.6% YoY in May, to 3.3% YoY in Jun. Lastly, miscellaneous goods and services also decreased from 3.7% YoY in May, to 3.5% YoY in Jun. Importantly, ROSSTAT's core inflation measure continued to trend lower, as we expected, from 3.8% YoY in May, to another record low of 3.5% (3.45%) YoY in June.
Upside risks remain. Although at a historical low, sticky inflation expectations remained constant at 10.3% in June, and continued seemingly elevated, compared to headline YoY inflation. The CBE has noted before that public expectations of prices are influenced by the price of staples, and hence higher food inflation could slow down the convergence of households’ expectations towards actual levels. A faster-than-expected recovery in domestic demand also remains a risk to inflation. In addition, we had flagged in earlier publications that the general downward trajectory in consumer prices may momentarily see upside risks from mounting exchange rate pressures. The exchange rate began to depreciate in June, and weakened by 4.6% through the month. Moreover, seasonal variations on the C/A, and a still dovish central bank, will remain points of pressure for the exchange rate through the rest of the year. We expect the exchange rate to continue depreciating to reach 59.5 by end-2017 (currently 60.1).
The CBR had signaled earlier this month that they would like to ensure stability of prices at the 4.0% target and in order to do that it would look at the 12m moving average YoY inflation (currently at 5.4%). Despite the pressures noted above, we believe that there exists room for the easing cycle to continue, although at a gradual rather than front-loaded pace. We retain our call for another 4x25bps in cuts in the remaining meetings of the year.