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Sanctions Likely to Accelerate Food Prices Growth
In August, Rosstat reported a decline in the current rate of inflation to 0.2% from 0.5% in July. Usually in August, inflation slows down even more, often reaching negative values. The moving annual average inflation rate, having reached its peak in June (7.8%) dropped slightly in July (7.4%), and then rose to 7.6% in August.
Table 1: Key indicators of inflation, %
| 2013 | 2014 | ||||||||||||
| Aug | Sep | Oct | Nov | Dec | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | |
| In monthly increments | |||||||||||||
| Inflation | 0,1 | 0,2 | 1 | 0,6 | 0,5 | 1 | 0,7 | 1 | 0,9 | 0,9 | 0,6 | 0,5 | 0,3 |
| Core inflation (Rosstat) | 0,5 | 0,7 | 1 | 0,6 | 0,4 | 0 | 0,5 | 0,8 | 0,9 | 0,9 | 0,8 | 0,6 | 0,7 |
| Core inflation (CfD) | 0,4 | 0,6 | 1 | 0,5 | 0,4 | 0 | 0,5 | 0,8 | 0,9 | 0,9 | 0,7 | 0,5 | 0,7 |
| Core inflation (Rosstat), s. adj. | 0,5 | 0,5 | 1 | 0,6 | 0,5 | 0 | 0,5 | 0,8 | 0,9 | 1 | 1 | 0,7 | 0,6 |
| Core inflation (CfD), s. adj., incl | 0,5 | 0,5 | 0 | 0,5 | 0,4 | 0 | 0,5 | 0,7 | 0,9 | 1 | 0,9 | 0,7 | 0,6 |
| food products, s. adj. | 0,5 | 0,7 | 0 | 0,5 | 0,5 | 0 | 0,6 | 1,1 | 1,4 | 1,8 | 1,5 | 1 | 1 |
| non-food products, s. adj. | 0,3 | 0,2 | 0 | 0,3 | 0,3 | 0 | 0,3 | 0,5 | 0,5 | 0,5 | 0,4 | 0,4 | 0,4 |
| services, s. adj | 0,6 | 0,5 | 1 | 0,7 | 0,6 | 1 | 0,7 | 0,5 | 0,9 | 0,6 | 0,6 | 0,5 | 0,5 |
| Non-food core inflation (CfD), s. adj. | 0,4 | 0,3 | 0 | 0,4 | 0,4 | 0 | 0,4 | 0,5 | 0,6 | 0,5 | 0,5 | 0,4 | 0,4 |
| In annual increments | |||||||||||||
| Inflation | 6,5 | 6,1 | 6 | 6,5 | 6,5 | 6 | 6,2 | 6,9 | 7,3 | 7,6 | 7,8 | 7,4 | 7,6 |
| Core inflation (Rosstat) | 5,5 | 5,5 | 6 | 5,6 | 5,6 | 6 | 5,5 | 6 | 6,5 | 7 | 7,5 | 7,8 | 8 |
| Core inflation (Rosstat) | 4,8 | 4,8 | 5 | 4,7 | 4,8 | 5 | 4,9 | 5,3 | 5,9 | 6,5 | 7 | 7,3 | 7,5 |
Note: s. adj. – seasonally adjusted. In the HSE CfD's methodology, core inflation (CCPI) does not include certain foods, such as fruit and vegetables, eggs, and alcohol; nonfood items, such as gasoline, furs, and tobacco; and services such as transportation, housing, utilities, education, extended health care (sanatoriums and spas), and pre-school education.
Source: CEIC Data, estimates by the HSE's Centre for Development
Seasonal adjustment of the price dynamics reveals a marked increase in food inflation to 0.9% from 0.4% in the previous month.
Graph 1. Prices of food and non-food products (increase to previous month, seasonally adjusted), %
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Source: CEIC Data, estimates by the HSE's Centre for Development
As expected, prices of foods hit by the Russian sanctions began to grow, particularly prices for fruit and vegetables – those grew sharply by 1.3% in August, following a record decline over the previous months with a drop of 6,5% in July.
The new acceleration in price growth affected meat and poultry (up to 2.0% in August from 1.6% in July), fish and seafood (up to 1.4% from 1.0%), and cheeses (up to 2.7% from 0.3%). In contrast, the prices of milk, liquid dairy products, and butter continued to follow the same trend as before; although admittedly, there were fewer banned items in this category.
As a result, the seasonally adjusted price index of the foods affected by the sanctions increased by 1.4% in August – and since the total weight of these products in the basket of goods and services used to calculate the CPI stands at 14%, the cumulative inflation increased by 0.2 percentage points.
In fact, back in July, i.e. prior to the food sanctions imposed on August 6, food prices just began to decline after an upward trend, but after the sanctions, one can only expect the prices of these foods to show a sharp increase.
The price growth of other foods has slowed down due to the new harvest, a favorable situation on the global food markets, and the adaptation of prices to the ruble's strengthening between May and June.
Non-food items unaffected by sanctions showed a slowdown in price growth to 0.44% in August compared to 0.56% in July. However, the rate in August (5.4% p.a.) exceeding by 1 p.p. the average rate in the pre-devaluation 2013 (4.4% p.a.), suggesting that the non-food sector is still recovering from the losses it suffered in the first wave of devaluation.
Prices Will Grow
Generally, the inflation dynamics in recent months suggests that the ruble strengthening between May and June 2014 has failed to lower the inflation rates to their pre-devaluation levels. Revaluation was short-lived – slightly over two months – followed by a second wave of devaluation, bringing the exchange rate to 34 rubles per dollar in early July and to 37 rubles per dollar in early September 2014 (+9%). The HSE Centre for Development's analysts expect "a further slowdown in price growth" to pass by almost unnoticed by the commodity market, and both food and non-food prices to grow at an accelerated pace between September and October in response to the exchange rate factor alone.
In addition, they expect the prices of food items affected by Russia's sanctions to grow even faster. It should be noted that the price increases reported by Rosstat in its August statistics are based on the data as of August 21-25 – i.e. just 20 days after the introduction of the sanctions – rather then on the end of August data, and the full effect of the sanctions will become apparent later.
A combination of these two factors (the exchange rate and the food sanctions) has put an end to any hopes of lowering the annual inflation rate. Instead, inflation may increase from 7.6% in August to 8% by the end of 2014 and stay there for the first few months of 2015, and then the expected introduction of the sales tax may further contribute to it. Under this scenario, even if food sanctions are lifted in 2015, it may not help to bring inflation down to a level below 6.5%.