The Key Factor Keeping Inflation at Bay Will Be the Declining Domestic Demand

In July 2013, the inflation rate in the Russian Federation accelerated: the Consumer Price Index, as seen by the month’s results, amounted to 0.8% (against 0.4% in July), thus dropping below its year-earlier level of 1.2%.

As a result, the inflation rate in per-annum terms went up to 5.6%. The core inflation rate in July 2013 was 0.3%, which is below its index for the same period of last year by 0.2 pp. The prices of foodstuffs in July remained unchanged (against growth by 0.5% in June).

This happened due to the decline, on June, of the prices of fruit and vegetable products (-3%) and a slowdown in the growth rate of prices for granulated sugar (from 1.0% in June to 0.1% in July), bread and bakery products (from 0.5% in June to 0.3% in July), and alcoholic beverages (from 0.8% in June to 0.5% in July). At the same time, the growth rate of butter prices increased (from 0.7% in June to 1.1% in July), as well as that of prices for milk and dairies (from 0.2% in June to 0.8% in July).

The growth rate of the prices and tariffs established for commercial services rendered to the population in July amounted to 3.1%, thus rising significantly above its June level (0.6%), which was largely due to the upward adjustment, at the month's beginning, of the housing and utilities tariffs - by 7%. The most significant increase was demonstrated by the tariffs for natural gas supply (12.6%) and electricity (11.2%).
The prices of passenger transport services continued their upward movement, having increased by 2.2%, which was also true of prices of spa resort services and out-bound tourism - these rose by 4.1% and 3.1% respectively. The prices of personal consumer services (+0.4%), insurance services (+0.4%) and medical services (+0.6%) were also on the rise.

In July, the growth rates of prices for nonfood commodities declined on June 2013, amounting, by the month-end results, to 0.1% (against +0.2% in June). In this commodity group, the steepest upward movement was demonstrated by the prices of tobacco products (+1.2% against +1.6% in June 2013), pharmaceuticals (+0.5% against +0.6% in June 2013), motor gasoline (+0.1% against -0.2% in June 2013). Meanwhile, the prices of radio and television sets continued to decline (–0.1%).

The CPI, as determined by the results of the period of 1-26 August, increased by 0.1%. As a result, the cumulative inflation rate since the year's beginning rose to the level of 4.5% (against 4.7% over the same period of 2012). As of 26 August, the per annum inflation rate increased above 5.6%.
Later on, prices may experience upward pressure in response to the expected lower crop yields resulting from the unfavorable weather conditions in some regions (drought in the south of Russia and rains across the Middle Volga Region and Siberia); another contributing factor may become the weakening of the Russian ruble. The major factors keeping inflation at bay will be the declining domestic demand (a phenomenon that has already been observed for a year) and the continuing slowdown in the growth rate of money supply (the per annum growth rate of M2 dropped from 19.1% as of 1 July 2012 to 15.5% as of 1 July 2013).
A.V.  Bozhechkova – Researcher