Inflation rebound was analyst looking for when, not if
The one upside of Russia’s economic downturn has been the scope for reining in Russia’s hitherto out of control inflation rate, but economic analysts say the hard road is ahead.
Having experienced inflation ease from its height of about 15% in 2008, all the way through the global financial crisis and the ensuing economic downturn though to 5.8% in June, policy makers are now preparing for what they see as rising inflationary pressure as Russia’s economic rebound brings consumer demand back into focus.
Most analysts see Russia’s inflation rate rising over the second half of the year, with key questions being whether it will fall any further before it rises and the impact of the drought on food price inflation.
Finam analyst, Maksim Klyagin says he is expecting a significant rise during the half, with the key drivers being the economic rebound and rising consumer demand.
“We expect the inflation rate increase to 8.1% in 2H 2010 on the back of the economic rebound and increasing consumer demand. Rising inflation can reflect the economic rebound, with easing unemployment and rising consumer demand and purchasing power. But it can also stem from increased foreign investment, which boosts productivity over the longer term, but which boosts demand in the short term leading to shortages.”
Anna Bogdyukevich, macroeconomic analyst at Gazprombank is also seeing inflation accelerate from its historically low rate, but sees it remaining relatively low in an historical sense for Russia.
“The inflation rate will definitely increase assuming that growth of consumer demand, fuelled by rising purchasing power and lower unemployment, is gaining momentum . An increase in demand will be the prerequisite for increase in inflation rate. At present inflation figures are still affected by technical factors, such as high base effect from the previous year, the effect of which will gradually decline in the second half of the year”
Olga Naydenova senior analyst at Otkritie says a key driver of inflationary pressure will be the major increase in money supply, on the back of increased investment, strong commodity earnings by Russian exporters, as well as the massive demand stimulus and liquidity support measures introduced by the government at the height of the economic downturn. She adds that scope for using the Rouble to dampen inflation in this context will be limited by the jump in imports Russia has experienced through the first half of the year.
“Money supply is growing at 31 percent year to year, which will put pressure on inflation. We do not expect further strengthening of the ruble, since there was a decline of the current account of the Russian budget against a background of growth of imports by 33 percent year on year”
Inflation and drought impact
Anatoliy Shal, financial Analyst at JP Morgan assumes that over-year-ago inflation rate is likely to pick up in 2H10 on base effects and increasing food inflation, but he also believes it is still a chance of heading lower over the very short term.
“We see headline CPI at 7.1% year on year in December this year, up from 5.8% in June. Inflation may fall to around 5.5% year on year, from the current 5.8%, in the coming couple of months, but then is likely to rise to near 7% by year-end on base effects and, possibly, stronger food prices."
Aton senior macroeconomist, Peter Westin, is also seeing inflation rising by the end of the year, but adds that the onset of the drought across much of Russia will see the forecast revised.
“Our forecasts on inflation figure remains at 7.7%, however, assuming the recent rebound and several weather factors we shall revise this forecast slightly to higher level but we hope it wont cross the bar line of 8%.”
Almost all analysts agreed that the impact of the drought would have an impact on inflation. JP Morgan’s Anatoliy Shal believes it will certainly lead to food prices inflation, but that its effect on broader inflation is likely to be muted.
“The drought in several Russian regions is likely to affect grain prices, hence prices for bread, cereals, meat, milk. However, CPI ex food, energy and regulated tariffs (core inflation) is likely to stay muted in the coming quarters remain of the view that the first rate hike will be delivered only in 2Q11.”
Finam’s Klyagin also believes that will have some impact, but in line with government output forecasts is not expecting any shortages on domestic markets.
“Rising grain export prices might add 2 percentage points to inflation, but Russian domestic market will not face any shortage.”
Bogdyukevich from Gazprombank says the drought may add up to accelerating inflation by pushing the prices of agricultural goods up.
“The total figure for inflation in 2010 may turn to be above the official forecast of 7.0%”
Other inflationary factors
Despite the prospect of rising inflation, most analysts believe that it is unlikely to get out of control with Finam’s Klyagin, saying that it is to be expected in Russia with a key economic focus becoming productivity.
“It is a normal situation for a developing economy, and assuming that years ago the Russian economy was even more dependent on other countries, we can notice that the current situation in previously undeveloped sectors is getting better and that the Russian government is stepping forward to boost industrial productivity and development of main sectors to reduce imports and increase the employment rate.”
Anatoliy Shal from JP Morgan adds that whilst the agricultural sector will face problems, and despite unemployment weakening in June economic activity surveys remain relatively strong.
“The Manufacturing PMI edged up from 52.0 to 52.6 in June on stronger output and new orders. On the negative side, the employment sub-index fell below the 50 threshold again.”
Aton’s Peter Westin says that another key factor in driving imports, but also affecting inflation, is the depreciation in the euro which took place between April and June in the wake of the Greek debt crisis. He says this is making some EU imports cheaper.
“While the unemployment rate is shifting up, we can see a good tendency as regards spending power among the population. The spending power increase can be caused by euro weakening against the Rouble, making many imports cheaper.”
He says that he think s the Rouble may continue to strengthen over the short term.
“I believe the ruble will strengthen and the slight increase of the inflation rate shall be seen only in later August and September depending on drought recovery and fruits and vegetables export.”