Russia’s CPI likely to slow to around 9% by mid-2016, 7.3% by late 2016 on decelerating core inflation

Russia's economy contracted sharply in 9m15 with GDP declining 3.7% due to international sanctions, terms of trade shock, tightening of monetary policy and the country's countersanctions. Russia's domestic demand has been impacted badly that was partly countered by stronger net exports.

By mid-2015, the rate of sequential contraction moderated, confidence indicators started rebounding and financial conditions were easing. However, the economy was again hit by a second wave of RUB depreciation and oil price decline. In the coming quarters, the economic rebound might be helped by the moderating drag from deleveraging; however, fiscal policy is expected to tighten that will weigh on growth.

In 2016, inflation in Russia is likely to decelerate, but still continue to be above the central bank's comfort zone. Inflation decelerated to 12.9% in December after peaking 16.9% in March 2015, with the help of base effects and decelerating core inflation. Over-year ago comparisons are likely to become increasingly lower in coming quarters as the effect of supply side shocks go away. Meanwhile, demand-side forces are expected to continue decelerating core inflation. Currency dynamics is the main risk as RUB has depreciated further due to continued drop in oil prices.

"We expect CPI to slow to around 9% by mid-2016 and to 7.3% by end-2016. Real wages are expected to fall around 10% in 2015 and more than 3% in 2016", says JP Morgan.