Russian CPI Exceeds Expectations In 2020 Despite Weakness In Demand

The bad news is that the scale of the inflation pick-up keeps exceeding expectations, about which we have the following observations and conclusions:

  • Higher-than-expected CPI means a lack of disinflationary effect of weak demand. While indeed food inflation is the primary contributor to the overall CPI pick-up (the former accounts for 1.4ppt out of the total 1.9ppt increase of the latter throughout 2020), non-food products inflation also picked up – from 3.1% YoY to 4.8% YoY – and contributed to a 0.4ppt pick-up in CPI (Figure 2). Looking deeper at the composition of the non-food CPI evolution, all items except apparel showed an acceleration in price growth throughout 2020, be they dependent on imports (such as consumer electronics) or not (construction materials, gasoline). The services sector did show a 1.1ppt YoY disinflation throughout 2020 but that did not affect the overall picture due to its relatively low weight of 28%. The lack of disinflation in products despite the 4.1% YoY retail sales drop in 11M20 suggests low sensitivity to the weakness in consumer demand. Meanwhile, it is not guaranteed that the upcoming recovery in consumption amid a c.4% increase of state pensions in February, state sector salaries in October, and possible additional social support ahead of the September Parliamentary elections will not be pro-inflationary.
  • The pick-up in CPI seems to be affecting inflationary expectations of households, which have also been on the rise at the end of the year (Figure 1), with producers' price expectations also elevated. The unanchored nature of the local inflationary expectations amid nearly-missed official CPI forecasts are likely to be a cause of concern for the Bank of Russia, requiring a more cautious approach to inflation targeting in the coming months.

Figure 1: CPI jumped to 4.9% YoY in December, pushing up expectations

(Click on image to enlarge)

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