Information Notice of Bank of Russia:
Under the impact of temporary factors annual inflation holds below 3%. It is estimated at 2.5% as of 11 December 2017.
In 2017 Q4, increased supply of farm produce on the back of growing crop productivity and the shortage of long-term storage facilities continued to exert a downward pressure on consumer price growth. As a result, annual food inflation fell to 1.1% in November 2017. The majority of factors associated with the 2017 harvest will cease to have a disinflationary influence in the first half of 2018. The contribution of the exchange rate dynamics to annual inflation slowdown diminishes and will be exhausted in 2018 Q1.
Annual growth in prices of non-food products, which stood at 2.7% in November, is observed to decline, while services prices went up by 4.2% over the year. According to Bank of Russia estimates, the majority of annual inflation indicators reflecting the most sustainable price movements are somewhat below 4%.
The slowdown of inflation was conducive to a decline in inflation expectations, which nevertheless remains unstable and uneven. The anchoring of inflation close to 4% will require both further decrease in inflation expectations and making them less susceptible to price changes.
Annual inflation is expected to be under 3% in late 2017 and come close to 4% by late 2018 as the impact of temporary factors is exhausted.
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 food and oil prices, which are characterised by high volatility. The fiscal rule will set off the impact of the oil market conditions on inflation and the domestic economic environment as a whole. At the same time, certain factors generate mostly pro-inflationary risks: this includes the situation in the labour market, potential changes in the consumer behaviour, and the nature of inflation expectations.
The extension of the agreement between oil-exporting countries lowers the uncertainty of energy prices’ dynamics and related pro-inflationary risks over a one-year horizon. However, the risks of upward deviation of inflation from the forecast in the medium term still prevail. 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 all over the forecast horizon.
Moving forward, the Bank of Russia’s key rate decisions will be based on its assessment of the balance of risks of inflation’s material and sustainable deviation in either direction from the target, as well as the dynamics of economic activity against the forecast. The Bank of Russia will continue its gradual transition from moderately tight to neutral monetary policy and holds open the prospect of some key rate reduction in the first half of 2018.