Russia: Inflation rises in August; ban on imports and weak currency may fuel inflation going forward
September 4, 2014
In August, consumer prices rose 0.2% over the previous month, which was below the 0.5% rise recorded in July. August’s timid rise was on par with market expectations and mainly reflected that a drop in prices for food stuffs, particularly of fruits and vegetables, offset an increase in prices for non-food products. Traditionally, Russia registers mild increases in consumer prices in August due to a seasonal decrease in fruit and vegetables prices.
Despite the monthly drop, annual inflation inched up from 7.5% in July to 7.6% in August. The reading in July had marked the first moderation in inflation since the beginning of the year. The Central Bank has already stated that it is unlikely that inflation will move toward the Bank’s 5.0% target before the end of the year.
Core consumer prices, which exclude short-term price changes that are influenced by administrative and seasonal factors, rose 0.6% in August, which mirrored a similar increase in July. Annual core inflation increased from 7.8% in July to 8.0% in August, which is the highest level since August 2011.
Russia is likely to continue experiencing rising inflation in the coming months as a result of the government’s decision to ban imports of meat, poultry, dairy products, vegetables, fruits and other products from the European Union, Norway, the United States, Canada and Australia in early August. The measure was a retaliation to their sanctions against Russia over the crisis in Ukraine. Moreover, in the medium-term, the removal of currency controls aimed at fostering flexibility in the foreign exchange market is also likely to have an impact on inflation. Fuelled by an escalation in hostilities along with Western sanctions, the ruble has weakened notably in recent days. A potential weakening of the currency in the coming months and the resulting pass-through effect on prices, combined with the impact of food inflation, may prompt the Central Bank to hike interest rates further this year, with further negative implications to economic growth.
Author: Ricardo Aceves, Senior Economist