Bloomberg News

Russian Inflation Target Challenged as Food Prices Advance

July 05, 2012

Russia’s unexpected jump in inflation after a weaker ruble stoked food costs means the central bank will have a harder time keeping consumer-price growth below last year’s record low, economists in Moscow said.

Prices surged 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 Moscow-based Federal Statistics Service 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 6.1 percent in 2011, a two-decade low, 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 dropped 9.2 percent last quarter after a fall in oil prices, Russia’s biggest export earner. The currency weakened 0.3 percent against the dollar to 32.4650 as of 2:27 p.m. in Moscow. Ruble debt due 2021 gained for a fifth day, cutting the yield to 8.19 percent.

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, which warned that inflation would accelerate starting in July because of utility-price increases, has left its benchmark interest rate unchanged since December and is forecast to keep rates on hold when it meets July 13.

“We’re sure we’ll finish the year within the target range,” central bank Deputy Chairman Sergey Shvetsov told reporters in Moscow July 3. The annual rate will stay below 6 percent in July, he said.

Still, policy makers said after their meeting last month that “volatility on the world currency market” would remain a source of medium-term inflation risks.

‘Main Reason’

“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 by phone. 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.

Russia’s grain crop will fall to 80.5 million to 85 million tons in the 2012-13 season from 94 million tons the previous year, Andrei Sizov Jr., managing director of Moscow’s SovEcon research center, said July 3.

The surge in fruit and vegetable prices last month may reflect “poor harvest expectations” among retailers, Natalia Orlova and Dmitry Dolgin, analysts at Alfa Bank in Moscow, said today in a research note.

“We view this as another sign that inflation this summer may surprise on the negative side,” they wrote. The inflation rate may reach 5.9 percent in July because of increases in electricity, water and other utilities prices this month.

‘Casting Doubt’

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. Inflation in the first two days of July alone was 0.5 percent, the service said.

Cumulative price growth in 2012 through July 2 was 3.8 percent, compared with 5.1 percent in the same period of last year, according to the statement. The tariff increases will add at least 1.5 percentage points to the annual figure, “casting doubt on the official target of 5 percent to 6 percent,” analysts at ZAO Raiffeisenbank in Moscow said today in a note.

In annual terms, Russia’s inflation rate was probably 4.8 percent as of July 2, according to HSBC’s Morozov. Still, the central bank shouldn’t respond by increasing rates because core inflation remains “benign,” he said.

Core inflation, which strips out volatile items such as energy and food, was 0.4 percent last month, matching estimates in a Bloomberg survey.

“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.

While rates will stay on hold for now, he said, “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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