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. Last Updated: 07/27/2016

June Inflation Jumps But '07 Forecast Stays

The Central Bank on Wednesday stood by its forecast that annual inflation would fall this year to 8 percent despite a surprise 1 percent rise in consumer prices in the month of June.

"Unfortunately, inflation accelerated in June -- consumer prices rose by 1 percent. The main reason is higher fruit and vegetable prices," bank chief Sergei Ignatyev told the State Duma.

But Ignatyev still forecast prices would grow by "around" 8 percent this year, down from the latest 12-month rolling figure of 8.5 percent and from last year's figure of 9 percent.

The June month on month figure was above a previous 0.5 percent to 0.6 percent forecast by Economic Development and Trade Minister German Gref.

"If the Central Bank does not take any additional measures to cap inflation, the 8 percent inflation target may become unrealistic," said Vladimir Tikhomirov, an analyst at UralSib.

Monetary authorities are finding it tough simultaneously to curb prices and the ruble exchange rate due to a boom in capital inflows that followed the lifting of currency controls a year ago.

Surging prices for food have complicated matters. A ban from April 1 on foreign traders in the country's markets as well as a forecast bad harvest might be leading to price increases that are higher than expected.

Ignatyev said allowing the ruble to revalue affects inflation in two ways -- by making imported goods cheaper, with a six-month lag, and by slashing the current account surplus through rising imports, with a delay of up to two years.

"A significant rise in imports this year was a result of the ruble strengthening in 2005 and 2006," Ignatyev said, pointing to the current account surplus shrinking to $38 billion in the first six months from $55 billion in the same period of 2006.

He said net capital inflows reached $67 billion in the first half of the year, up from $14 billion in the first half of 2006, as a result of auctions of assets in bankrupt oil firm Yukos and stock market floats by banks Sberbank and VTB.

But he forecast inflows would taper off in the second half of the year and total $70 billion for 2007 as a whole.

He stood by the Central Bank's forecasts for growth in M2 money supply of 37 percent to 39 percent this year and 4 percent to 5 percent for real effective appreciation of the ruble, a measure of how quickly the economy is losing competitiveness in relative terms.

Ignatyev said prices for fruit and vegetables as well as money supply growth will be the key factors affecting consumer prices in the second half of 2007 and acknowledged the June increase in prices for food products was a surprise. "It was unexpected and I cannot explain it yet," he said.