Persistent deflation: why prices in Russia have been declining for the third week in a row

Russia has been experiencing steady deflation for the third week in a row. Prices of consumer goods decreased by 0.13% over the previous week. Before that, deflation was less than two weeks ago — it was 0.05%. This phenomenon has a temporary unloading effect on the inflation expectations of the population and businesses, experts believe. Why prices are falling is in the Izvestia article.

The transition to a reduction

Deflation has been recorded in Russia for the third week in a row. This phenomenon is the opposite of inflation — it is characterized by a stable level of prices for goods and services. In the period from July 29 to August 4, consumer prices, in particular, decreased by 0.13%. This is evidenced by Rosstat data provided by the Ministry of Economic Development.

It is noteworthy that prices in this period decreased at a faster rate than in the previous two weeks, when deflation was 0.05%.

The decline in prices in the food segment accelerated to 0.34% week-on-week. Prices for fruit and vegetable products, which partially include borscht products, decreased to 4.6%. The cost of potatoes, for example, decreased by 10.8%. Carrots fell in price by 8.4%.

The growth rate of prices for other food products decreased to 0.05%. In the case of bread, they decreased to 0.1%. The decline in butter prices resumed, it amounted to 0.1%.

The slowdown in price growth, as previously noted in the Central Bank, was recorded in most regions of the country. Compared to May, the rate of price increase has become slower in 42 regions of the Russian Federation. In 17 regions, prices decreased or remained at the same level. In other regions, the cost of goods continued to rise.

Overall, annual inflation slowed to 8.8% as of August 4 from 9.02% recorded a week earlier.

What led to deflation

The nature of the weekly price reduction is mainly seasonal, according to investment adviser to the registry of the Central Bank, President of the Association of Investment Advisers Yulia Kuznetsova. The accelerated reduction in the cost of fruit and vegetable products was a key driver of deflation.

Prices for fruits and vegetables may be cheaper because the market is saturated with these products, confirms Yuri Lyandau, Doctor of Economics, Professor at Plekhanov Russian University of Economics. Manufacturers and retail chains are trying to sell such goods as soon as possible, as they are available in large quantities, adds Inna Litvinenko, Associate Professor of Economics and Management at the Russian State University of Social Technologies. And this trend will be observed until the end of August, she predicts.

At the same time, food products outside this group show weak dynamics — butter, dairy products, pasta and cereals showed stagnation or a slight decrease in prices, Kuznetsova points out.

It is also important to take into account that inflation was prolonged, which is why the authorities started talking about the need to introduce state regulation into the pricing process, Lyandau draws attention.

"Many retail chains have heard these statements and tried to stop the further rise in the cost of products," he believes.

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An additional impact was the decrease in domestic demand, which has been observed recently against the background of the popularity of expensive deposits, which were easy to open, says Litvinenko.

— It was more profitable for citizens to keep savings than to spend, which affected the market. After all, if there is no demand, then prices will fall while supply remains at the same level," the economist notes.

Another extremely important factor contributing to deflation is the reduction in the key rate, the Izvestia interlocutor points out.

— The fact is that at a rate above 20%, manufacturers shifted the cost of expensive loans onto the shoulders of the consumer. Until the rate cut, they had exhausted all means to maintain production and investment growth. Reducing the key allowed the situation to improve slightly, which the entrepreneurs reflected in the price, the expert explains.

At the same time, the fixed short-term deflation has a temporary relief effect on the inflation expectations of the population and businesses, the Izvestia interlocutor is convinced.

— This may slightly soften price sentiment and create a feeling that consumer inflation is getting out of control. However, it is important to understand that deflation is caused by seasonal and temporary factors. This is not a sign of a structural recovery in the economy," she stresses.

It is important that the Central Bank reacts to the situation and does not leave the rate too high for a long time, because in this case deflation can lead to a decrease in business activity and consumer demand, says Kuznetsova. This is especially true at the current key rate level.

Impact on the key rate

It is worth noting that the slowdown in price growth has a direct impact on the monetary policy determined by the Bank of Russia. At the last meeting of the Board of Directors, the Central Bank announced a decision to reduce the key rate to 18%. According to the regulator, the Russian economy continues to return to a balanced growth trajectory, which made it possible to mitigate the PREP.

The Central Bank noted that in reducing inflationary pressure, the impact of tight monetary conditions on demand is increasingly evident. The effects of such a PREP are reflected in the low rates of price growth, including through the strengthening of the ruble. The price dynamics remains heterogeneous, but the spread across the components has decreased somewhat.

A combination of factors such as three weeks of deflation, slowing prices for non-food products and weak dynamics in the service sector give reason to expect a reduction in the key rate again at the next meeting of the Bank of Russia, predicts Yulia Kuznetsova.

— So far, the most likely range is by 100 basis points, to the level of 17%, especially against the background of the strengthening of the ruble and the stabilization of world prices, — the expert believes.

However, according to the interlocutor of Izvestia, the Central Bank will act carefully, assessing the stability of the trend. The deflationary effect will peak in the first half of August, and then it will begin to fade naturally, she expects.

A further decrease in demand in the Russian market will lead to a reduction in the key interest rate by the Central Bank, Inna Litvinenko agrees. She admits that at a future meeting it may be reduced from the current 18% to 16%.

— And with a further reduction in the key rate, the demand for deposits and deposits will fall. The population will begin to transfer savings into the purchase of goods, which will allow entrepreneurs to invest in production. And this, in turn, will lead to further economic growth," the economist is convinced.