Information Notice of Bank of Russia:
Annual inflation remained sustainably low. In January 2018 it stood at 2.2%. Permanent factors slow down consumer price growth alongside temporary factors. Furthermore, permanent factors may have stronger effect on inflation than previously estimated. In January 2018, annual consumer price growth declined across all staple goods and services. Food inflation slowed to 0.7% while non-food inflation declined to 2.6%; service prices increased by 3.9%. According to Bank of Russia estimates, most annual inflation indicators reflecting the most sustainable price movements are below 4%. Increased supply in the farm produce market continued to exert downward pressure on food inflation. Most factors associated with the 2017 harvest will cease to have a disinflationary influence in the first half of 2018. At the same time, investment in agriculture and the sector’s technological advancement pave the way for a sustainable increase in its production capacity in the medium term. The contribution of the exchange rate dynamics of the latest months to annual inflation slowdown will be exhausted by the end of the first quarter of this year.
The slowdown of inflation was conducive to inflation expectation decline which nevertheless remains unstable and uneven. This requires both further decrease in inflation expectations and reduction in their sensitivity to price changes.
The slowdown of annual consumer price growth may continue in the first half of 2018. This partially results from last year’s high base effect of food inflation. According to the Bank of Russia’s forecast, annual inflation will remain somewhat below 4% in 2018 and will hold close to this reading in 2019.
Short-term pro-inflationary risks have abated. Therefore the balance of inflationary and economic risks has shifted slightly towards the risks to economic growth. The uncertainty over the situation in global financial markets has increased. This year annual inflation is much less likely to exceed 4%. In this environment the Bank of Russia will continue to reduce the key rate and may complete the transition from moderately tight to neutral monetary policy in 2018.
Depending on the situation, a number of factors may cause inflation to deviate from the target both upwards and downwards. They include the dynamics of highly volatile food and oil prices. The fiscal rule will set off the impact of oil market conditions on inflation and domestic economic environment as a whole. At the same time, certain factors generate mostly pro-inflationary risks: they include the developments in the labour market, potential changes in consumer behaviour, and the nature of inflation expectations.
In the medium term (in 2019-2020) the risks of inflation’s upward deviation from 4% still prevail over deviation below 4%. First, increased structural labour shortage may cause labour productivity growth to considerably lag behind wage growth. Second, inflationary pressure may stem from changes in households’ behaviour as the propensity to save becomes much lower. Third, inflation expectations remain elevated and subject to fluctuations caused by movements in prices of certain goods and services and the exchange rate. Besides, the medium-term balance of risks for inflation dynamics will depend on potential budgetary and tariff decisions in 2019–2020. The Bank of Russia will also monitor risks posed by external factors over the entire forecast horizon.