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. Last Updated: 07/27/2016

NEWS ANALYSIS: Inflation Calm but Worst Is Yet To Come

Inflation has beat expectations by edging up a mere 2.8 percent in March, but economists warned Tuesday that the ruble's recent slide will lead to a big jump in prices.

At the start of the year experts predicted a 100 percent jump in retail prices, but inflation for the first quarter amounted to only 16 percent.

First Deputy Prime Minister Yury Maslyukov, in revealing the inflation figures Monday, credited the lower-than-expected result on regional economies, which have remained relatively stable despite the ruble's slide.

Economists do not suspect the data was manipulated. "Figures for January proved to be accurate," said Roland Nash, chief economist at MFK Renaissance. "I do not see why Maslyukov would fiddle with figures in March."

Despite the positive news, however, the government is failing to calm widespread market fears. "They seem to have inflation under control," said Vladimir Konovalov, an economist with Credit Suisse First Boston. "But inflationary expectations are out of control."

The government has conducted a reasonably tough monetary policy since the beginning of the year, with the money base officially increasing from 199 billion rubles at the end of December to 206.4 billion at the end of March.

But the currency dropped 6 percent in March and the slide gained momentum this month. In the first five days of April, the ruble shed 3.9 percent, quickening the growth of consumer prices.

Roughly half of all food products consumed in Russia are imported. The devaluation of the ruble, therefore, has a direct impact on prices.

"Inflation will be markedly higher in April, May and June," warned Nash.

Growing gasoline prices are also seen as contributing to inflation. "In the second half of March most refineries raised their wholesale prices by 15 to 20 percent," said Leonid Mirzoyan, oil and gas analyst at Regent European Securities.

CSFB estimates that inflation will grow even more sharply during the second half of 1999 as Russia prepares for parliamentary elections.

Further uncertainty over the economic future is reflected in ruble/dollar forward rates. Three-month forward contracts in Moscow traded at 30 to 35 rubles to the U.S. dollar Tuesday while 12-month paper sold for 49 to 69 rubles.

"The quotes reflect negative sentiments and uncertainty," said Konovalov. "Expectations of a higher ruble slide in the second half of the year reflect deteriorating fundamentals in the second half of the year."

CSFB predicts the currency, currently trading at about 25 rubles to the dollar, will sell for 40 rubles by year's end and inflation will stand at 88 percent.

The state, however, expects inflation will be 50 to 60 percent at best and 80 percent in the worst case scenario.

"The second quarter will be easier than the first three months of 1999," said Mikhail Delyagin, economic adviser to Maslyukov. "We already have experienced monthly inflation of 8.5 percent, the threat of an IMF default, two ruble crashes and several political crises."