Russian Price Gauge Falls

Russia has done so well in vanquishing inflation that it pushed the core index of consumer prices to the cusp of falling below its level in the U.K. for the first time. While the Bank of England is under pressure to act after core inflation accelerated to the fastest since 2011, the same gauge reached a new historical low in Russia. Data released on Thursday showed Russia’s index of consumer prices that strips out volatile components such as food and energy slowed to an annual 2.8 percent in September from 3 percent a month earlier, according to the Federal Statistics Service. In the U.K., it jumped to 2.7 percent in August.

The Bank of Russia, which has delivered four rate cuts in 2017 by a cumulative 150 basis points, last month left open the possibility of pauses as well as decreases of a quarter to half a percentage point as it charts the way forward. Given that the central bank still sees inflation expectations as elevated and unanchored, it will “attach greater significance to pro-inflationary risks than factors acting in the opposite direction,” according to Governor Elvira Nabiullina.

“Core inflation is collapsing as the disinflationary forces generated by the recession in 2015-16 intensify,” said Neil Shearing, chief emerging markets economist at Capital Economics Ltd. “Against this backdrop, the incessant focus of policy makers on the need to anchor inflation expectations and thus easing policy only gradually looks increasingly misplaced.”

The central bank will cut its 8.5 percent benchmark to 8 percent by the end of the year, according to the median of forecasts in a Bloomberg survey.

Russia’s headline index of consumer prices reached 3 percent in September from a year earlier after already slowing to a record of 3.3 percent in August. The median of 15 estimates in a Bloomberg survey was for a gain of 3.1 percent. It remains within the central bank’s target of “near or around” 4 percent.

“The low core inflation rate shows the decline in pressure on overall inflation,” Vladimir Tikhomirov, chief economist at BCS Financial Group, a Moscow brokerage, said by phone before the data release. “There’s no pressure on prices from the side of consumption, which is reflected in both the core and headline indexes.”

The bad news for Russia is that the outsized role of fruit and vegetable prices in shaping inflation expectations means the core index is of less value for the central bank. While food accounts for almost 40 percent of Russia’s consumer-price basket, it’s closer to 10 percent in developed economies such as the U.K.

“Food prices play a key role in setting inflation expectations,” said Vladimir Miklashevsky, senior economist at Danske Bank A/S in Helsinki. Core inflation “won’t have a big impact on the consumer and monetary policy, as the key indicators for the Bank of Russia are the consumer-price index and inflation expectations.”

Still, the historic deceleration in Russian inflation to less than a fifth its level two years ago — and the even faster decline in the core index — shows how much headway policy makers made in keeping price pressures in check as they maintain a “moderately tight” stance. On an annual basis, core inflation peaked at 17.5 percent in March 2015.

“Such record lows for core inflation create a reserve for the central bank” in case of a price pickup “against the background of further recovery in consumption and an expected increase in wages for state employees at the start of 2018,” said Dmitry Polevoy, chief economist for Russia at ING Groep NV in Moscow.

The core measure is among the indexes the Bank of Russia uses to analyze trends in prices, allowing it to assess inflation “without the noise,” according to its draft policy guidelines for the next three years. Its other tools include inflation gauges that strip out the cost of housing utilities, fruit and vegetables, as well as state-administered tariffs and other regulated prices.

Inflation may be close to reaching a “floor,” according to Nataliya Shilova, chief analyst at B&N Bank PJSC in Moscow, who predicts the ruble will weaken in the fourth quarter. The ruble, which has gained 6.6 percent against the dollar this year, traded 0.3 percent stronger at 7:26 p.m. in Moscow.

“Of course, a downward deviation of more than one percentage point is significant, but according to our estimates, inflation will return to 4 percent in 2018,” she said before the data release.