Russian inflation expectations driven up by unstable prices for staple goods

Russian inflation expectations driven up by unstable prices for staple goods
Russia's inflation rate is currently 5.5% and falling, but the soaring costs of staples like potatoes and sugar mean the population believe the rate of inflation will soar this year to 14.5% – the highest inflation expectation in years. / wiki
By bne IntelliNews May 18, 2021

The Russian population is currently expecting inflation to soar to 14.5%, despite the fact it is currently 5.5% and looks like it is starting to fall.  

For a people that lived through the years of hyperinflation in the 90s, rising costs in times of crisis is something of a bogey man and inflation fears consistently rank as one of the issues people worry about more than anything else.  

Russia's annual consumer price inflation in April 2021 slowed down to 5.5% from 5.8% year on year in March, according to the latest data from RosStat statistics agency, and in line with expectations.

More recently, Russia's weekly consumer price inflation for the week ending May 11 slowed down to 0.1% week on week, according to the latest data from RosStat statistics agency.

Although the weekly inflation slowed down from its previously persistent 0.2% w/w reading, 0.1% w/w remains "a fairly high figure, corresponding to 0.6% growth in monthly terms", Sberbank CIB commented on May 14.

But even the 0.1% w/w rise is nowhere near the level that will lead to a 14.5% y/y rise in prices the population is expecting.  

“According to [a central bank] survey, observed and anticipated inflation have risen rapidly in April. While observed inflation has risen to 14.5% y/y in April vs. 12.7% in March, 12-month-ahead expectations have risen to 11.9% y/y in April vs. 10.1% y/y in March,” Sova Capital said. “Notably, the subgroup without savings witnessed a steeper rise in both observed and anticipated metrics (16.4% y/y in April vs. 12.4% y/y in March in the observed component and 12.5% y/y in April vs. 10.6% y/y in March in the expected component).”

The reason for the pessimism is that the prices of staple goods like sugar, pasta and fruit and veg have all soared in the last year, with some prices doubling.  

 

Sugar prices were up 75% in 2020 and remain elevated in April. Other products like potatoes, carrots and eggs are also up in April by more than 30% in April y/y, leading the government to try to introduce administrative controls to artificially hold price hikes down. 

The spiking prices of things Russians buy everyday have unsettled consumers and led to an expectation of unrealistically large price rises over the rest of the year.  

The problem is starting to become political, with Prime Minister Mikhail Mishustin recently blaming the “greed” of food retailers for the rise in prices – a popularist move to try to divert blame from the government.  

The government, keen to be seen to be doing something about inflation, has launched a number of initiatives targeting vulnerable products. Mishustin signed a decree last week implementing a floating tariff for sunflower oil exports that will go into effect on September 1 and run for nine months in an effort to keep the domestic market well supplied with cooking oil.  

Sunflower seeds will also be subject to an export duty of 50%, but not less than $320 per tonne, effective from July 1. The export tariff for rapeseed (30%) has been extended to August 31.

Sugar has also come in for attention and restrictions on exports have already been tried, but the schemes are continuously being tinkered with as administrative controls typically bring on very temporary relief, but quickly lead to distortions that can make things worse.  One effect is that food producers often hike the prices on non-regulated products to maintain profits, thus the controls can cause more widespread food inflation.  

In the latest in the sugar saga, the government is considering an intervention fund and has suggested duty-free imports as price stabilisation measures for the sugar market for next season. Kommersant said that the Ministry of Economic Development does not see price caps being prolonged beyond June 1.

“The implementation of any of the plans being considered by the government could have a significant effect on the market, subject to their scale,” Sova Capital said in a note. “Currently, there is an intervention fund for grain, which stands at 360,000 tonnes – or less than 0.4% of annual consumption – while the maximum amount the fund is allowed to sell during a year is 1mn tonnes (some 1.2% of consumption). We intend to watch closely for more details on the potential state purchases and future pricing mechanism. Meanwhile, there has been a duty-free import quota for sugar May 15 to August 31, which covers 350,000 tonnes, or 6% of annual consumption.”

Despite the problems, food inflation is expected to fall in the coming months as the summer gets underway and Russians traditionally grow a lot of food at their dachas. Last year Russia’s potato production was up by a third as many Russians on lockdown chose to spend it at the dacha working in the garden; privately grown potato production soared to make up two thirds of the country’s entire potato crop as a result.

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