The New Harvest Slows Down Inflation

A drop in food prices, particularly fruit and vegetable prices, usually observed in summer, and an improved situation in the commodity markets have helped slow down the rate of inflation, according to expert analysis in Comments on State and Business published by the HSE's Centre for Development

In June, consumer inflation dropped by a third, mainly due to the new vegetable crops coming into the market. Other commodity markets continue to respond to the Crimea-related weakening of the ruble, but have failed to show any signs of responding to its subsequent strengthening so far. Between May and June, inflation slowed down from 0.9% to 0.6%, but remains above last year's rates, and the year-on-year inflation rate increased from 7.6% to 7.8% over the same period. The seasonal decline in food prices and the overall improvement in commodity market have both contributed to the current drop in inflation.

Table 1: Key indicators of inflation,%

	2013							2014
	June	July	Aug	Sept	Oct	Nov	Dec	Jan	Feb	March	Apr	May	June
in monthly increments
Inflation	0,4	0,8	0,1	0,2	0,6	0,6	0,5	0,6	0,7	1,02	0,9	0,9	0,62
Core inflation (CfD)	0,3	0,3	0,4	0,6	0,5	0,5	0,4	0,4	0,52	0,79	0,86	0,88	0,73
Core inflation (CfD), seasonally adj,, incl,	0,4	0,4	0,5	0,5	0,4	0,4	0,4	0,3	0,52	0,76	0,94	1	0,86
food products, s, adj,	0,5	0,5	0,5	0,7	0,4	0,4	0,5	0,4	0,62	1,16	1,49	1,81	1,49
non-food products, s, adj,	0,3	0,3	0,3	0,2	0,3	0,3	0,3	0,2	0,35	0,51	0,54	0,48	0,43
services, s, adj,	0,5	0,6	0,6	0,6	0,5	0,7	0,6	0,6	0,75	0,53	0,86	0,62	0,59
Non-food core inflation (CfD), s, adj,	0,4	0,4	0,4	0,3	0,3	0,4	0,4	0,3	0,45	0,51	0,62	0,51	0,47
in annual increments
Inflation	6,9	6,5	6,5	6,1	6,3	6,5	6,5	6,1	6,2	6,9	7,3	7,6	7,8
Core inflation (CfD)	5,1	4,9	4,8	4,8	4,7	4,7	4,8	4,7	4,9	5,3	5,9	6,5	7

Note: s. adj. – seasonally adjusted. CfD – the Centre for Development
Source: CEIC Data, estimates by the HSE's Centre for Development

The price movements in recent months, even after seasonal adjustments, can be explained by several important factors revealed by the Rosstat data for June 2014.

First, the commodity markets are still adapting to the ruble's weakening in the first quarter. But have not yet responded to its strengthening since March. The peak of seasonally-adjusted price growth occurred in March-April (1.5% for foods and 0.5% for non-foods), but the rates of price increases in May and June were still higher than those observed before the weakening of the ruble for most product groups as well as larger aggregates.

Fruits and vegetables were the only significant exception, but the drop in the price of produce was probably due to the new harvest and availability of domestic produce. In contrast, there has been no significant drop in seasonally adjusted prices on imported fruits in recent months.

Graph 1. Prices of food and non-food products (increase to previous month, seasonally adjusted), %

Source: CEIC Data, estimates by the HSE's Centre for Development

Second, the situation in certain food markets has stabilized – e.g., the global milk prices, peaking in April, have declined and slowed down the overall price growth of dairy products.

The situation in the meat market is recovering from Russia's ban on imports of pork from Europe (to avoid the spread of disease) and beef from Australia (due to the use of a hormone which is banned in Russia). In late June, pork prices increased by 15%, and meat prices in general increased by 8%. The growth in meat prices peaked at 3.2% in May followed by a drop to 2.3% in June. Based on recent weekly data, meat prices continued to grow in early July, but at a much slower rate.

The decline in fruit and vegetable prices between May and June offset the price increases between February and April.

Table 2. Post-devaluation Inflation Rates

	Monthly price increases (seasonally adjusted),%						Accumulated excess of the benchmark, pp	Accumulated excess of the benchmark contribution to CPI, pp
	Benchmark (November-January average)	Feb 2014	March 2014	Apr 2014	May 2014	June 2014
Food products, including	0,6	0,7	1,5	1,5	1,2	0,9	3,1	1,12
Fruits, vegetables, and potatoes	0,9	2,2	2,2	2,4	-2,3	-5,9	4,2	0,15
Meat	0,2	0,5	1,1	1,9	3,2	2,3	8,1	0,75
Butter, oils and fats	0,2	0,9	1,4	1,7	1,3	1	5,2	0,06
Milk and dairy products	1,2	1,6	2,7	2,2	1,5	1,2	3	0,08
Sugar	-0,9	-0,2	3,9	4,5	2,5	3,6	18,7	0,09
Confectionery	0,5	0,5	0,5	1	0,9	0,9	1,3	0,03
Tea, coffee	0,3	0,3	0,6	0,7	0,9	1,2	2,4	0,02
Alcoholic drinks	0,6	1,3	1,9	1,2	1,3	0,9	3,9	0,2
Non-food products, including	0,3	0,4	0,6	0,6	0,5	0,5	1,1	0,41
Electric appliances and other household appliances *	0,2	0,4	0,5	0,6	0,4	0,5	1,4	0,02
Petrol	0,3	0,6	1,4	1,1	-0,1	0,7	2,1	0,06
Cleaning and maintenance products	0,5	0,3	0,2	0,4	1,1	1,4	1	0,01
Health and medical supplies	0,3	0,5	0,9	1	1,1	1,1	3,2	0,06
Cars	0,1	0,2	0,6	0,7	0,4	0,2	1,7	0,12
Services
International tourism	0,8	2,9	3,1	1,8	0,5	0,8	5,3	0,08
TOTAL contribution to inflation **		0,13	0,51	0,49	0,29	0,2		1,61

Note: Highlighted in blue are periods where the price increase was below the benchmark.
* Independent of the aggregates (i.e. food products, non-food products), data is provided for certain types of products and services which respond visibly to devaluation;
** The effect of devaluation on the prices of electric appliances has been noticeable since December 2013; therefore, this effect was estimated for five months rather than three months (the benchmark is the October-November 2013 rate);
*** Increases in inflation were calculated by rows – food products, non-food products, and international tourism. The sum total of effects for products analysed independently of the aggregates is lower than the total effects for aggregates.
Source: CEIC Data, estimates by the HSE's Centre for Development

Third, the effect of devaluation in the non-food segment was stretched over time even more than in the food segment. Thus, the monthly price growth rate reached 0.6% in March and never dropped below 0.5% untilthe end of June (the price growth rate of 0.3% was standard prior to the devaluation). However, the slowdown in price growth would be even less noticeable if it were not for the car market, where price growth in May and June slowed down sharply to 0.4% and 0.2%, respectively, following a dramatic decline in sales in April, reaching -17.3% in June 2014 compared to June 2013.

It follows from the above that the slowing down of inflation is just starting. Even though some of the resources have been exhausted (e.g. the prices of fruits and vegetables are unlikely to maintain the 6% seasonally adjusted monthly decline rate), a full-scale decline in inflation is still to come.

Despite tariff indexation in June, the increase in tariffs for the public this year will be a record low at an average of 4.2% versus 11.0% last year, so they should not affect the downward inflationary trend too much.

The HSE's experts agree with the Ministry of Economic Development in expecting the accumulated annual inflation rate to drop to 7.5% if price increases in July do not exceed 0.5% and no new inflationary shocks occur. Then by the end of the year, inflation may well offset the 1.6 percentage points added to the annual inflation rateover the past five months.

Nikolai Kondrashov

 

July 16, 2014