Russia's January 2016 CPI inflation decelerated greatly to 9.8% from 12.9% in December. The slowdown in the CPI inflation was mainly due to the base effects as monthly inflation accelerated 1%, equal to the 10-year average. In January 2015, Russia had recorded monthly inflation of 3.85% due to exchange rate pass-through from significant depreciation of the Russian ruble in Q4 2014 and January 2015.

Food inflation was recorded at 9.2%, lower than the headline inflation. This suggests lesser dependence on imports as food import sanctions and the RUB depreciation earlier have encouraged import substitution. Other goods inflation continued to be elevated at 10.9% y/y, suggesting RUB pass-through. However, goods inflation slowed due to the relatively low rise in gasoline prices. Services inflation decelerated to 8.9% y/y, indicating lower wage growth of just 2.2% y/y in Q4 2015.

At present, most of the base effects have been used up as inflation decelerated around 600bp. Base effects of around 165bp can still be offered in February and March. Hence, inflation in Russia might decelerate to 8% by the end of March 2016. However, this greatly relies on the pass-through impacts from the recent decline in the ruble.

"In our view, even though the RUB has sold off considerably, the pass-through effects will be lower than the previous 20-25%. This is because food imports have declined (by 39% in 2015) and food exports have fallen (by 28%), causing food prices to be less dependent on import prices", says Barclays.

Another challenge for price increases is the slow growth rate. The overall drop in imports, that have declined nearly 50% from 2012 high, makes overall prices less dependent on import prices. There is already some proof of a lower pass-through in the relatively tame 1% m/m inflation in January 2016. Moreover, if oil prices remain steady at the current levels of around $34/b for Brent crude, the ruble might also stabilize at the present levels. This will give the way for further deceleration of inflation.

"Under these conditions, we think it is still possible that the CBR will initiate cuts to its 11.0% key rate at its March policy meeting. Delays are possible, particularly if oil prices fall from current levels. Overall, we expect 200bp of rate cuts in 2016. However, as noted by the Bank of Russia, a slight increase in headline inflation is likely in Q2 16 because of negative base effects", says Barclays.