Russia’s headline inflation likely to be 8.5%-9% y/y in H1 2016

Russia's headline inflation had decelerated to 12.9% y/y by the end of 2015 from its peak of 16.9% y/y in Q1 2015. The expected disinflation did not happen as fast as initially planned by authorities and assumptions as it was impacted by certain supply shocks that might continue to play a role for some time, such as introduction of sanctions against selected food imports from Turkey and deepening of FX depreciation. The ruble has depreciated 25% against the US dollar since November.

"According to our estimates, the former effect will not be significant statistically, as it might add only 0.4-0.6pp to annual inflation, or conceptually, as monetary policy is set to ignore one-off supply shocks. The latter effect still implies some uncertainty, as the FX trend adjustment has yet to reach a conclusion", says Societe Generale.

Moreover, import prices might become less reactive because of deepening substitution effects on the demand side and the simultaneous decline of other emerging market currencies, which makes trade-weighted ruble less reactive. Hence, disinflation in the consumer basket's core component surpassed headline inflation, decelerating to 12.9% yoy after a rise to 15.5% y/y in Q4 2015.

"While the major disinflation trend (triggered by base and demand-pull effects) will persist, we raise our outlook for headline inflation by nearly 0.7pp due to both risks for inflation mentioned above. Our new forecast is based on disinflation to 8.5-9.0% yoy throughout H1 16, and to 7.5% yoy by end-H2 16", says Societe Generale.