Pass-through of VAT increase to prices has generally ended; secondary effects could be minor - Central Bank of Russia analysts

MOSCOW. March 12 (Interfax) - The pass-through of the increases in VAT and other taxes and fees to prices has largely ended as based on January inflation and weekly data for February, with significant secondary effects from tax amendments being barely noticeable, analysts in the research and forecasting department of the Central Bank of Russia said in the regulator's Talking Trends bulletin.

"The scale of secondary effects from the January acceleration in price growth could be minor, as indicated by the decline in inflation expectations among households and businesses. However, the still clearly elevated level of inflation expectations requires maintaining tight monetary conditions to reduce inflation toward the Central Bank's target and affix it there," the analysts said.

The increase in VAT was the main factor affecting the acceleration in price growth in January, though not the only one. The Central Bank's research and forecasting department estimates that the actual pass-through of the direct increase in VAT to prices at 0.3-0.4 percentage points in January from a seasonally adjusted price increase of 1.1% month-on-month. A comparison of median price increases across groups of goods and services observed in 2018-2019 and in 2025-2026 indicates higher price growth during the current period of the increase in the VAT rate, the analysts said.

Prices rose 1.6% month-on-month, not seasonally adjusted, in January, with annual inflation rising to 6.0%. "Price dynamics returned to a more restrained pace, close to the 4% trajectory, in February according to weekly data, while annual inflation declined," according to the bulletin.

The analysts said that the Central Bank's inflation forecast of 4.5%-5.5% for 2026 and the target to reach 4% in 2027 suggest that consumer prices should grow on average by 0.33% in the remaining months and by 4% on an annualized basis, as adjusted for seasonal factors and the October hike in housing and utility tariffs.

"This requires that growth in steady price components decelerate to below 4% on an annualized basis. Growth in these components should stabilize rather than slow in the second half of 2025. The January figures for steady price growth were expectedly significantly distorted/overstated, while the February figures could conversely be somewhat understated owing to a temporary decline in demand," according to the bulletin.

The regulator's analysts believe that a more reliable estimate of steady price growth figures should be available later in April-May.