Russian Inflation Stalled in April Before Sanctions Fallout

(Bloomberg) -- Russian inflation stalled last month near its lowest level ever as the economy braces for the impact of the ruble’s worst month since 2015.

With the sluggish recovery gaining traction and wage pressure on the rise, little now stands in the way of an upswing in consumer prices. Adding to the mix, the ruble lost over 9 percent against the dollar in the world’s second-worst performance in April, threatening to fan the cost of imported goods. A depreciation of 10 percent may add a percentage point to inflation, according to the central bank’s research and forecasting department.

Consumer prices proved resilient to shocks last month. Inflation in April was 2.4 percent from a year earlier, unchanged from March and in line with the median of 24 forecasts in a Bloomberg survey. The core index, which strips out volatile energy and food items, rose for the first time since 2015 to an annual 1.9 percent, according to data released on Friday.

“The scale of a pickup in inflation will still depend on the scale of demand recovery,” said Dmitry Polevoy, an economist at ING Groep NV in Moscow. “Optimism among consumers has indeed continued to improve, but their interest in savings still remains, given the overall uncertainty.”

As sentiment improves during a recovery from Russia’s longest recession this century, the central bank said for the first time last week that given stronger business activity, it’s no longer helping to hold back price growth, which paves the way for inflation to return to the target of 4 percent. Companies also have to contend with a weaker ruble in the wake of the latest U.S. sanctions and a resurgent dollar. IHS Markit’s Russia Manufacturing Purchasing Managers’ Index showed cost burdens for producers rising “markedly” in April.

“Manufacturers were able to reduce their costs during the crisis, which affected their margins and led to lower sensitivity in the price of the final product,” Roman Ermakov, an analyst at Lanta-Bank in Moscow. “Now, watching a recovery in demand, they are cautiously beginning to raise prices.”

Losses in the exchange rate are a complication for the Bank of Russia’s path to monetary easing. Last week, it held its key interest rate unchanged for the first time since July and said the potential for cuts “shrank somewhat.”

What Our Economists Say...

The ruble’s slide will fuel faster inflation. We expect a hint of that in the April numbers, but the effects should be more obvious in May.

--Scott Johnson, Bloomberg Economics

The Bank of Russia expects the ruble’s weakening will speed up inflation without pushing it past 4 percent in the absence of other external shocks. Policy makers kept their forecast for price growth to reach between 3 percent to 4 percent at the end of the year and remain close to the target in 2019.

Among manufacturers, input price inflation already accelerated in April to the fastest since September 2015, according to the survey of the industry by IHS Markit. It said that most of the blame for the increase was placed on “less favorable exchange rates” that boosted the cost of imported raw materials.

“Average cost burdens rose markedly as prices of imported raw materials were pushed up,” said Sian Jones, economist at IHS Markit.

©2018 Bloomberg L.P.

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