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Another expensive year ahead: inflation could rise above target in 2008

January 16, 2008 | RBC

The Economy Ministry expects inflation in January to stand at 1.8 percent, up from 1.7 percent during the same period last year. The significant increase in inflation is mostly due to rising public transport costs and household bills at the beginning of the year, according to the Economy Ministry. However, experts are less optimistic, predicting higher inflation for January, between 2 and 2.5 percent.

High inflation is expected in January, as a result of seasonal increases in the price for housing and utilities services and food prices. A source in the Economy Ministry said yesterday that the ministry projected a 1.8 percent inflation for January. Commenting on the report, Tatyana Orlova, an economist at ING Bank, said the Economy Ministry’s estimate was too optimistic, and that she expected 2 percent.

Igor Nikolayev, chief strategic analyst at FBK, is more cautious and predicts 2.5 percent for January. Increases in the price of housing and communal services will account for about 1.2 percent, and higher public transport costs – for 1.1 percent, according to Nikolayev.

Meanwhile, food prices continue to rise. “There is still potential for growth as domestic prices have not yet caught up with world prices,” says Yevgeny Nadorshin, an Trust Investment Bank. He believes inflation will remain under 1.5 percent over the next two months. “This is a moderate estimate. A moratorium on price increases for socially important products expires on January 31, after which forecasts for February and March could be raised,” Nadorshin noted.

The price freeze agreement means losses for trade chains, David Yakobashvili, Chairman of Wimm-Bill-Dann, told RBC Daily, adding that prices for socially important products would rise once the measure was lifted, but not dramatically. According to Yakobashvili, traders will not risk raising prices on the eve of parliamentary vote in March, waiting until after the election.

Another issue will be that of non-food prices. They are expected to rise faster in January and throughout the year than in 2007. One reason is the increased price for TV advertising. In addition, producer prices were rising very fast last year, by about 20 percent on average, according to Nikolayev.

“Prices should come to a balance. As a rule, non-food prices are more affected by producer prices,” he said. High inflationary expectations also add to inflation, too. Opinion polls carried out by Russia’s State Statistics Agency in the fourth quarter of 2007, revealed a decline in consumer confidence in Russia, sixty-six percent of respondents saying they feared significant price rises, up from 49 percent a year before.

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