Bloomberg News

Russia Inflation Overshoot Shows Risk to Goal as Food Costs Rise

July 04, 2012

Russia’s inflation overshoot highlights the difficulties the central bank faces in keeping consumer-price growth below last year’s record low as a weaker ruble stokes food costs and utility tariffs rise, economists in Moscow said.

Prices jumped 4.3 percent from a year earlier in June, the fastest pace of 2012 and quicker than all 16 economists in a Bloomberg News survey estimated, the Federal Statistics Service in Moscow said yesterday. Inflation from the previous month was 0.9 percent, compared with 0.5 percent in May, as produce prices surged 13.4 percent, the service said.

Monetary-policy makers held price growth at a record-low 6.1 percent in 2011 and are targeting an improvement to 5 percent to 6 percent this year. Last month’s jump jeopardizes those efforts, with inflation set to accelerate to as much as 6.5 percent by August, according to Alexander Morozov, chief economist at HSBC Holdings Plc in Moscow.

“What is surprising is how quickly headline inflation has reversed its deceleration,” Morozov wrote yesterday in a note to clients. “The central bank’s job of keeping inflation in the range is seen as ‘Mission impossible.’”

The ruble, which dropped 9.2 percent last quarter after a fall in oil prices, Russia’s biggest export earner, fell 0.7 percent against the dollar to 32.36 by yesterday’s close of trading in Moscow. The Micex Index rose 0.5 percent to 1,444.31, its highest level since May 2.

Ruble Effect

Central bank Chairman Sergey Ignatiev said last month that a drop in the currency wouldn’t immediately feed through to inflation. The bank has left its benchmark interest rate unchanged since December and is forecast to keep rates on hold when it meets July 13.

“The weaker ruble is the main reason for the inflation spike,” Vladimir Osakovskiy, chief economist at Bank of America Merrill Lynch in Moscow, said yesterday in a phone interview. The drop helped drive up costs for fruit and vegetables, which are mostly imported in June, he said.

About 40 percent of the food consumed in Russia is imported, Julia Tsepliaeva, head of research at BNP Paribas (BNP) in Moscow, wrote last week in a note. Food costs, which account for 30 percent of the consumer price index, had risen at a slower pace in the last year after a strong harvest.

While food inflation will probably accelerate as favorable base effects dissipate, it will do so at a moderate pace, Vladimir Pantyushin, chief economist at Barclays Capital in Moscow, said by e-mail.

‘We’re Sure’

“We’re sure we’ll finish the year within the target range,” central bank Deputy Chairman Sergey Shvetsov told reporters in Moscow July 3.

Consumer prices may advance 1.5 percent this month, pushing the annual figure to 5.9 percent, after the government delayed increases in tariffs for electricity and other regulated prices to July 1 from January 1, according to Osakovskiy.

Consumer prices rose 0.8 percent in the week ending July 2, the most since a jump of the same amount in January 2009, the statistics service said yesterday in a separate statement. Electricity prices surged 4.7 percent.

Cumulative price growth this year was 3.8 percent through the end of that week, compared with 5.1 percent in the same period of 2011, according to the statement.

In annual terms, Russia’s inflation rate was probably 4.8 percent as of July 2, HSBC’s Morozov said.

“With inflation now rising and domestic growth healthy, it should become easier for the central bank to defend its recent hawkish stance,” Clemens Grafe, chief economist at Goldman Sachs Group Inc. in Moscow, wrote yesterday in a note. “Although we expect rates to remain on hold as long as credit conditions are under pressure, owing to falling oil prices and global risk, we think the central bank will consider rate hikes if and when the world economy stabilizes.”

To contact the reporter on this story: Scott Rose in Moscow at

To contact the editor responsible for this story: Balazs Penz at

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