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. Last Updated: 07/27/2016

Inflation Slows in August, Rise Forecasted

Consumer price inflation slowed in August as newly harvested vegetables and grains were sold at rock-bottom prices, but analysts said Tuesday the economy remained vulnerable to fresh bouts of price rises.

Consumer price growth slowed to an impressive 1 percent last month compared with 1.8 percent in July. "Although these figures are ultimately strong by themselves — we should note their seasonal nature," UFG brokerage said in a research note.

The State Statistics Committee said the biggest difference was in food prices — which rose only 0.3 percent from 1.8 percent in July. Non-food and services rose 1.4 percent versus 0.8 percent and 3 percent versus 3.8 percent, respectively.

Alexei Moisseyev, an economist at BNP Paribas, said the government, alarmed by prices creeping higher, had taken steps to curb the growth in money supply in August.

Russia’s monetary base, which has risen by more than 40 percent since the start of this year, dropped to 430.8 billion rubles ($15.5 billion) on Aug. 28 from 435.1 billion rubles ($15.6 billion) on Aug. 21.

The Central Bank has been printing rubles to bolster its hard-currency reserves through purchasing dollars. But between July 28 and Aug. 25, reserves only rose by $900 million, compared with a $2 billion rise between June 30 and July 21.

But Moisseyev said the long-term danger of inflation remained, especially as excess ruble liquidity hangs over the economy and banks lack domestic investment instruments.

"The inflation problem is not solved principally because the domestic debt market must be revived to tie up money," he said.

Russia’s local debt market is a pale shadow of what it was before the 1998 financial crash, and the government, with petro-dollars flowing in and budget coffers brimming, is reluctant to issue new paper any time soon.

Commercial banks, wary of investing in the manufacturing economy, have little alternative but to channel their huge ruble resources into the foreign exchange market.

Moisseyev said the ultimate solution to higher prices would be reforming the economy, which in its current state is unable to absorb a growing money supply.

"When the economic function of reallocating financial resources between different sectors of the economy works normally, the problem will solve itself," he said.

"Until then the key problem will persist. If oil prices are low, there will be problems with debt payments, if they are high, there will be problems with printing money."

Russian exporters are obliged to sell up to 75 percent of their hard- currency revenues on local authorized exchanges.

Moisseyev forecast CPI would grow to 1.5 percent in September, but slow to 1 percent in November and December, driving the annual 2000 CPI to 18.7 percent.