In July, CPI significantly slowed to 9%y/y. The slowdown was expected, but its size delivered some surprise: bloomberg’s consensus expected 0.1%m/m, or 9.2%y/y – the Economy Ministry anticipated the range 0.2-0.3%m/m. The main reason of this slowdown was food deflation in month of month terms (-0.7%m/m in July) while core inflation remained at its usual 0.4%m/m.
Earlier seasonal effect of cheap fruits and vegetables is likely to pull annual inflation down in 2011 as a whole. Seasonal deflation (in month of month terms) is very likely in Aug-Sep. The government targets inflation to slow to 7.5%y/y by 2011-end. Stronger than usual seasonal effect may help to approach this target. However, we expect massive pre-election spending, including commitment to hike salaries of government employees by 10% and teachers’ salaries by 30%, to fuel inflation in Q4. The CBR is unlikely to change key rates before we see acceleration in CPI. We expect a new hike in Nov 2011.
BNP Paribas
Corporate & Investment Banking