Inflation expectations in Russia remain above target, likely to decline in August

Inflation expectations in Russia continue with their gradual decline; however, they continue to be far above the target. It might take a few more years for the Central Bank of Russia to convince the people in its commitment to keep inflation at around 4 percent, noted Nordea Bank in a research report.

Inflation expectations rose to 10.7 percent in July after staying stable at 10.3 percent in the prior two months. The rise shows population’s reaction to a higher actual inflation registered in June. Headline inflation accelerated mainly due to higher food and vegetables prices that were impacted by a later than usual harvest in a surprisingly rainy summer. Inflation expectations could not stay unaffected as they react especially strongly to the changes in food prices that still represents 38 percent of the consumption basked used to calculate CPI.

Traditional indexation of housing and utilities tariffs in the start of July has put additional upward pressure on inflation expectations. But, the general trend of inflation expectations since the start of 2016 continues to be downward.

Increased inflation expectations were a vital factor behind the central bank’s decision to keep its key interest rate on hold at the end of July. The central bank, in its statement has underlined that a sustainable drop in inflation expectations is needed for inflation to become anchored close to the 4 percent target. The future rate of the key rate would therefore be greatly determined by inflation expectations dynamics, stated Nordea Bank.

Inflation expectations are expected to come down in August after the registered spike in July. Continuing seasonal food and vegetables prices deflation gaining momentum for the fourth consecutive week underpins this hypothesis. This expected fall should allow the central bank to resume its easing cycle in September, noted Nordea Bank.

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