2 Sep 2010 13:42

SUMMARY: Drought to fuel Russian inflation, just over 7% possible in year

SOCHI. Sept 2 (Interfax) - The effects of the summer drought will fuel consumer price growth but the Central Bank still thinks inflation for the year will be 7% or thereabouts and far below the record low of 8.8% seen in 2009.

CB First Deputy Chairman Alexei Ulyukayev said on the sidelines of a banking forum in Sochi that price growth could accelerate for six to 12 months because of the drought, Ulyukayev said.

"The upswing in inflation is localized. Its impact will likely extend between half a year to a whole year. This could keep rates unchanged," he said.

Ulyukayev said that the upswing in inflation is not influenced by the general economic situation, the CB's monetary policy or capital flows.

He said the actual price shock from the summer drought would be brief and not last more than three to six months.

The CB expects weekly inflation of just under 0.2% in September, Ulyukayev said.

"September inflation will be worse than last year, at just under 0.2% per week," Ulyukayev said.

Russia's inflation came to 0.6% in August and could come to just over 7% for 2010, Ulyukayev said.

"The increase came to 0.6% in August. This was 0.15% a week," Ulyukayev said, adding that inflation for 2010 is forecast at around 7%.

The trend was for inflation to slow in March 2009 to July 2010, Ulyukayev said. The low in annual terms was 5.4% during that period. But the price shock from the abnormal weather began to be felt in August.

"Unfortunately the shock began in August, and the abnormal weather affected inflation and inflationary expectations," Ulyukayev said.

The CB still thinks inflation for the year will be a lot lower than in 2009. "This is a good basis for the further stabilization of conditions," he said.

Reports have said inflation, which had been 0.1% per week since the middle of March, sped up to 0.2% a week in the first three weeks of August due to the drought. It did not slow back to 0.1% until the last week of August.

The Federal State Statistics Service (Rosstat) estimates inflation was 0.6% in August 1-30, 2010, compared with zero in August 2009. This raised inflation in annual terms to 6.1% by the end of August 2010, from 5.5% at the end of July.

August price growth was fastest for buckwheat, wheat flour, eggs, granulated sugar, milk, butter and bread.

Inflation was 5.4% in January-August 2010, inclusive, down from 8.3% in the first eight months of last year, however inflation was zero in September and October 2009, and this is not expected to be the case in the same months of 2010.

Analysts told Interfax in a consensus forecast at the end of August that they thought inflation for the year would be 7.7%. The drought has already affected food prices, but it will be hard to gauge how much and for how long until the harvest has been completed. Other factors that could fuel inflation in H2 2010 include the low comparative base with last year and higher personal incomes and monetary base.

The Russian Economic Development Ministry has already raised its 2010 inflation forecast to 7%-8% from 6%-7%, and its 2011 forecast to 6%-7% from 5.5%-6.5%.