Russia’s inflation ended 2018 above the Central Bank of Russia (CBR) target of 4% as prices surged at the very end of the year. Inflation ended 2018 at 4.3%, jumping from 3.4% in November. However, analysts at Sberbank believe the slowing rise in wheat prices this year, less depreciation of the ruble and depressed consumer demand will hold inflation in 2019 to 4.7%.

In November there was a good chance of inflation coming in under the CBR’s 4% target rate, as December’s inflation usually comes in below 0.6% m/m. But in the event, it was unusually high, at 0.8%, Sberbank said in a note.

Food inflation reached 1.7% m/m in December — the highest level since February 2015. It appears that a number of inflationary factors in the food segment combined to deal a significant blow in December, Sberbank reports.

Fruit and vegetables (+8.9% m/m), eggs (+15.4%), bread (+1.1%), butter (+1.1%), pasta (+1.0%), meat and poultry (+1.0%) and milk (+0.9%) all saw a significant rise in price. For all of these items, inflation was driven mainly by ruble depreciation and rising producer costs (although the poultry segment also suffered a supply shock).

“As we have mentioned before, a 25% jump in global wheat prices last year was the main reason why food producers' costs increased, as higher wheat prices mean increased fodder costs. We estimate that ruble depreciation contributed 0.4 pp to the 4.3% inflation in 2018, while the surge in wheat prices added around 0.5 pp,” Anton Stroutchenevski, Rodion Lomivorotov and Artem Vinogradov of Sberbank CIB said in a note.

At the same time relatively weak household demand affected non-food inflation. In December, for example, non-food inflation was just 0.2% m/m, while in September-November it was 0.4-0.5%.

“We expect $/RUB to average 67 this year, so assuming that wheat price inflation returns to the single digits and household demand growth slows somewhat, year-end inflation (adjusted for the January VAT hike) should come in below last year's 4.3%; however, taking into account the VAT hike, which will add around 1 pp, we see the figure at 4.7%,” the Sberbank team said.