CBR Quarterly Inflation Review - Q3 2004
Central bank: cbr | Type: quarterly_review | Date: 2004-09-30

THE CENTRAL BANK
OF THE RUSSIAN FEDERATION
(BANK OF RUSSIA)
Inflation
Review
Third Quarter ♦ ♦ ♦ ♦ ♦ 2004
Research and Information Department
Major Inflation Indicators ................................. 1
Monetary Indicators ..................................... 18
Financial Market Indicators ............................ 25
Statistical Addendum .................................... 28
Inflation Review
Third Quarter ♦ 2004
According to the Federal Statistics
Service, consumer prices rose by 8.0% in
September 2004 as compared with De-
cember 2003 as against 8.6% in the same
period last year.
In 2004 Q3, consumer prices in-
creased by 1.8% as against 2.5% in Q2
and 3.5% in Q1. Month-on-month con-
sumer price growth in July stood at 0.9%
and in August and September 0.4%. Con-
sumer price inflation stood at 11.4% in
September 2004 as compared with Sep-
tember 2003 (in September 2003 it stood
at 13.3%), which is a high figure with re-
gard to the official inflation target.
Core inflation stood at 6.8% in Sep-
tember 2004 as compared with Decem-
ber of last year (it was 7.3% in the same
period of 2003). Prices of the goods in-
cluded in the core inflation calculation
grew by 2.4% in 2004 Q1, 1.8% in Q2 and
2.4% in Q3.
Calculated in the 12-month moving
period, core inflation last September
slowed to an estimated 10.7% as against
10.8% in September 2003. This means
that core inflation was slower than con-
sumer price inflation by 0.7 percentage
points and that, taking into consideration
the dynamics of prices of goods and ser-
vices not included in the core inflation cal-
culation, the full-year inflation rate may
slightly surpass the official inflation target.
Estimates show that growth in the
prices of goods and services included in
the calculation of core inflation in January-
September 2004 accounted for 5.5 per-
centage points, or 68.4%, of overall con-
sumer price growth as against 6.0 per-
centage points, or 69.1%, in the same
period last year. Thus, core inflation's con-
tribution to overall consumer price growth
was smaller than last year.
The high level of core inflation regis-
tered in the past two years has been
caused mostly by volatile, short-term
rather than long-term factors. In January-
September 2004, a major factor of the
Major Inflation Indicators
Inflation Review
Third Quarter ♦ 2004
slowing growth in the prices of goods and
services included in the calculation of core
inflation was the reduction of the growth
rate for non-food prices. At the same time,
a poor grain harvest in Russia and Europe
in 2003 and tension on the world's meat
market contributed to higher food prices,
especially for bread, bakery products,
meat and poultry.
Non-food prices rose by 5.5% in
September 2004 as compared with De-
cember 2003 (in the same period of 2003
they increased by 6.6%). This is the low-
est level registered in the period under
review in the last ten years. At the same
time, in 2004 Q2 and Q3 non-food prices
grew faster (by 2.1% and 2.0% respec-
tively) than in Q1 (1.4%). After a slight rise
in 2004 Q1 (by 0.6%), the growth in petrol
prices accelerated to 13.6% in Q2 and
11.4% in Q3. Overall, the price of petrol
increased by 27.3% in September as
compared with December 2003. Such
significant increment was due to high en-
ergy prices on the world market and, con-
sequently, considerable price growth in
the oil-extracting and oil-refining indus-
tries. In January-September 2003, the
price of petrol increased by 14.1%. Ac-
cording to estimates, consumer price
growth, measured without petrol prices,
in September 2004 as compared with De-
cember 2003 was slower than inflation by
0.3 percentage points (in the same period
of 2003, it was slower by 0.1 percentage
points).
Growth in the price of major non-food
products was slower than in January-Sep-
tember 2003. Television and radio set
Table 1
Inflation rates on the consumer goods market as a whole (%)
Growth
(September 2004
on December
2003)
Growth
(September 2003
on December
2002)
Result
Prices of goods and services included in core inflation calculation 6.8 7.3 Retardation
by 1.1 times
of which:
food prices excluding vegetable and fruit prices 8.0 7.1 Acceleration
by 1.1 times
non-food prices 5.5 6.6 Retardation
by 1.2 times
Service prices 14.3 19.7 Retardation
by 1.4 times
of which:
prices of goods and services regulated at federal and regional levels 16.1 21.0 Retardation
by 1.3 times
Vegetable and fruit prices -1.4 -3.4
Inflation Review
Third Quarter ♦ 2004
prices were down 1.4%. Estimates show
that in January-September 2004 non-
food price growth accounted for 1.5 per-
centage points, or 19.1%, of overall con-
sumer price growth as against 1.8 per-
centage points, or 21.2%, in January-Sep-
tember 2003.
In the first nine months of 2004, food
prices, excluding vegetable and fruit
prices, grew faster than non-food prices.
In September 2004, food prices as
a whole rose by 7.2% as compared with
December 2003 as against 6.1% in the
same period last year. Food price growth
in 2004 Q1 stood at 3.8%, Q2 2.1% and
Q3 1.1%.
Food price growth calculated with-
out taking account of vegetable and
fruit prices accelerated to 8.0% in Sep-
tember as compared with December 2003
as against 7.1% in the same period last
year. Growth in 2004 Q1 stood at 3.2%,
Q2 1.9% and Q3 2.7%.
In January-September, growth in the
prices of this group of products accounted
for 4.1 percentage points, or 50.8%, of
overall price increment on the consumer
goods market as against 3.6 percentage
points, or 41.6%, in the same period of
2003.
The most significant growth in Sep-
tember 2004 as compared with Decem-
ber 2003 was registered in the prices of
bread and bakery products (14.8%),
pasta (12.8%) and granulated sugar
(13.0%). However, bread and bakery
product prices this year grew less than last
year (in January-September 2003, they in-
creased 19.2%). While in January-June
2004 bread and bakery product prices in-
creased by 20% faster than in the same
period last year (13.6% as against 11.8%),
Table 2
Food price inflation (%)
Growth
(September 2004
on December
2003)
Growth
(September 2003
on December
2002)
Outcome
Bread and bakery products 14.8 19.2 Retardation
by 1.3 times
Cereals and legumes 10.5 17.4 Retardation
by 1.7 times
Pasta 12.8 7.7 Acceleration
by 1.7 times
Meat and poultry 11.7 5.0 Acceleration
by 2.3 times
Fish and seafood 5.3 9.6 Retardation
by 1.8 times
Milk and dairy products 3.6 2.6 Acceleration
by 1.4 times
Butter 1.0 4.4 Retardation
by 4.4 times
Sunflower oil -0.4 7.6
Granulated sugar 13.0 -0.9
Alcoholic beverages 6.8 7.3 Retardation
by 1.1 times
Inflation Review
Third Quarter ♦ 2004
in 2004 Q3 their growth was six times
slower than in the same period last year
(1.1% as against 6.6%).
After significant month-on-month
growth in July (9.1%), the price of granu-
lated sugar rose by 1.2% in August and in
September it fell by 1.9%. These dynam-
ics reflect a high level of price volatility for
this product, which is due to changes in
customs policy and instability of world
market demand.
Meat and poultry prices rose by
11.7% in September as compared with
December 2003, whereas in the same
period last year they grew by 5.0%.
Growth in meat and poultry prices con-
stantly accelerated in the second half of
2004. In June, they rose by 1.2% month
on month, whereas the figure for Septem-
ber was 1.7%. At the same time, the dy-
namics of meat and poultry prices differed
significantly. Beef and pork prices rose by
16.0% and 19.2% respectively in Septem-
ber as compared with December 2003
(beef prices were up 0.7% in the same
period last year and pork gained 0.3%),
while poultry prices inched up 0.5% as
Table 3
Major meat and poultry market indicators (% growth)
Meat and poultry Beef Pork Poultry
2004 2003 2004 2003 2004 2003 2004 2003
Food production (January-September as % of
January-September of previous year) 2.3 14.5
Livestock* and poultry production (January-September
as % of January-September of previous year)
-- by farms of all kinds 0.2 6.9
-- by agricultural enterprises 2.1 8.6 -7.7 3.2 -4.5 18.5 18.8 10.1
Imports (January-August as % of January-August of
previous year)
-- volume -13.8 -8.6 -16.6 -9.6
-- value -2.5 -5.8 -14.3 -9.9
Prices
-- livestock and poultry selling prices (September as % of
December previous)
15.2 3.3
-- consumer prices (September as % of December
previous)
11.7 5.0 16.0 0.7 19.2 0.3 0.5 14.4
-- import prices (August as % of December previous) 6.8 -0.1 -1.7 -5.3
Livestock population* as of beginning of month (October
as % of October previous)
-6.2 -4.8 -12.2 -0.5
*Cattle and pigs.
Inflation Review
Third Quarter ♦ 2004
against 14.4% in January-September
2003. The gap between the rates of
growth in meat and poultry prices, created
by the accelerated increase in poultry
prices from May to November 2003, be-
came smaller from the start of this year.
Growth in the prices of some food-
stuffs in September as against last De-
cember slowed down as compared with
the same period of 2003 (growth in fish
and seafood prices slowed by 1.8 times,
cereals and legumes by 1.7 times and but-
ter from 4.4% to 1.0%). The price of sun-
flower oil dropped 0.4% in that period.
The accelerated growth of agricultural
producer prices had a negative effect on
food price dynamics. In the first nine
months of the year, the selling prices of
farm produce increased by 7.5% as
against 6.8% in January-September
2003.
Vegetable and fruit prices fell by
1.4% in September as compared with De-
cember 2003 (they were down 3.4% in the
same period last year).
Vegetable and fruit price dynamics in
January-September 2004 were less vola-
tile than they have been in the last few
years. In the first half of the year, vegetable
and fruit prices hardly grew and in April
and May they even declined month on
month. In June, vegetable and fruit prices
rose by 13.9% as compared with Decem-
ber 2003 (in the same period last year they
increased by 33.7%). It was the smallest
growth registered in this period in ten
years. Therefore, the low level of veg-
etable and fruit prices in the first half of the
year precluded any significant decline in
these prices typical of July-October. In
2004 Q3, vegetable and fruit prices de-
creased by a lowly 13.4% as against
27.8% in the same period of 2003 and
21.6% in the same period of 2002.
According to estimates, in January-
September 2004, the decrease in veg-
etable and fruit prices accounted for a re-
duction in the general rate of inflation by
0.1 percentage points, or 0.9%. In Janu-
ary-September 2003, the negative contri-
bution of the decline in vegetable and fruit
prices to consumer price growth stood at
0.2 percentage points, or 2.1%.
If we exclude from the consumer price
index such products as bread and bakery
products, pasta, flour, meat (beef and
Inflation Review
Third Quarter ♦ 2004
pork) and petrol, this aggregate's growth
in September 2004 as compared with De-
cember 2003 will be slower than inflation
by an estimated 1.2 percentage points (in
2003, it stood at 0.6 percentage points,
whereas in 2002 it exceeded inflation by
one percentage point).
Prices of the paid services provided
to the public rose 14.3% in the first nine
months of the year against 19.7% in the
same period last year. In 2004 Q1 they in-
creased by 6.4%, Q2 by 4.4% and Q3 by
3.0%. The slowing of growth in service
prices was due to the slowing of govern-
ment-regulated service prices , which
in September 2004 increased by an esti-
mated 16.1% as compared with Decem-
ber 2003 against 21.0% a year earlier.
As for the government-regulated
prices, mention should be made first of all
of the slowing of growth in rent and ameni-
ties charges. Nevertheless, growth in rent
and amenities prices was most significant
in January-September 2004 at 21.8%
against 26.3% in the same period last
year. There was a sharp rise in pre-school
tuition fees (19.7%), while communica-
tions service charges fell 0.7%, the first
decrease in this period over the past ten
years. Meanwhile, the supply of commu-
nications services offered to the public
expanded 20.4% in January-September
as compared with the same period in
2003.
Growth in service prices in January-
September was faster than growth in the
prices of goods, which stood at 6.5%. Es-
timates indicate that growth in service
prices accounted for 2.5 percentage
points, or 30.9%, of overall consumer
price growth against 3.4 percentage
points, or 39.3%, in January-September
2003.
The analysis of the distribution of
increases in the prices of goods and
services in January-September 2001-
2004, based on a selection of more than
400 kinds of consumer goods and ser-
vices and made without taking account of
their weights in consumer expenses, re-
vealed a continuous decline in the aver-
age rate of price growth
1. However, each
year's decline had its specifics.
1 Price growth distributions shown in the charts are based on a smoothed histogram. Twenty growth ranges with a span of 2% each have
been used.
Inflation Review
Third Quarter ♦ 2004
In September 2003, unlike the situa-
tion in September 2002, inflation slowed
as compared with December of the previ-
ous year due to a contraction of the share
of goods and services with a fairly high rate
of price growth. This phenomenon
characterises the process of price dynam-
ics between different groups of goods and
services evening out and reflects the mac-
roeconomic situation. At the same time,
the range of growth in the prices of the
bulk of consumer goods and services re-
mained virtually unchanged in 2003 as the
slight change of the distribution median
(7.6% as against 8.0% in 2002) indicates.
Inflation slowed in January-Septem-
ber 2004 due to slowing growth in the
prices of goods and services in the princi-
pal growth range. This process confirms
the measures taken to reduce inflation are
effective, because the price slowdown af-
fected a broad range of goods and ser-
vices.
Another positive development with
regard to inflation was closing the gap
between the rates of growth in food and
non-food prices and services. However,
this process has not yet become a sus-
tained trend.
In the first nine months of the year, the
biggest growth (a sample average) was
registered in service prices, and the small-
est in non-food prices. However, there
was little difference between the price
growth medians calculated for the bulk of
foodstuffs and non-food products.
A statistical analysis of food price in-
creases indicates a fall in the sample av-
erage in January-September 2004. At the
same time, on the one hand, the price
growth range of the bulk of foodstuffs
grew narrower, reflecting smaller differ-
ences in food price dynamics. On the
other hand, the share of goods in the 14-
20% price growth range was quite large
due to a significant growth in the prices of
bread and bakery products and pasta,
caused by last year's poor grain harvest.
Meat prices also remained within this price
growth range (except poultry), although
their dynamics in January-September
2003 were moderate.
The distribution of non-food price in-
creases was characterised by a pro-
nounced maximum and small dispersion.
Therefore, the increases in the prices of
most goods in this group remained within
a narrow range. In the first nine months of
Inflation Review
Third Quarter ♦ 2004
2004, goods in the 1-9% price growth
range accounted for 81.4% of all non-food
products. In the same period last year, the
principal price growth range was 3-11%
and goods in this range accounted for
79.4%.
Slowing growth in the prices of goods
in this group in January-September 2004
was due on average to slowing growth in
the prices of non-food products in the
main growth range. At the same time, as a
result of rapid growth in petrol prices, the
share of non-food products whose prices
rose significantly expanded compared to
the previous year.
The distribution of service price in-
creases in the first nine months of 2004 is
characterised by three local highs. The
first falls within the 10-14% range and re-
flects the price dynamics of most con-
sumer services. The second local high re-
flects relatively slow growth in the prices
of tourist services. Unlike the situation in
the past few years, the third local high in
2004 corresponded to the deflationary
growth range, which included several
communications services.
Factors of inflation
Several factors shaped consumer
prices in January-September 2004.
External economic conditions
External economic conditions affect
not only output and producer price dy-
namics, but also the flow of foreign cur-
rency earnings to the domestic foreign
exchange market.
According to Bank of Russia esti-
mates, the average level of world market
prices of major Russian exports, adjusted
to their structure, rose by 16.8% in Janu-
ary-September 2004 as compared with
the same period last year. The price of
Urals crude was up 23.1%, petrol 33.3%,
diesel fuel 26.6%, fuel oil 2.8% and natu-
ral gas in Europe 4.0%. Non-ferrous metal
prices increased by 34% as the price of
aluminium gained 20%, copper 65% and
nickel 58%.
As energy prices and prices of other
raw materials continue to rise on world
markets and a gap remains between do-
mestic and world prices, Russian produc-
ers are likely to continue raising prices on
the domestic market.
The favourable price situation on
world commodity markets for Russian
exporters and the increased demand for
goods and services exported by Russia led
to a growth in exports and an increase of
the country's trade surplus.
In January-September 2004, exports
expanded by 32.1% year on year to
$129.1 billion and imports grew by 24.8%
to $66.6 billion. The trade surplus
amounted to $62.6 billion, an increase of
40.8% on January-September 2003 when
it stood at $44.4 billion.
Oil, ferrous metals, petroleum prod-
ucts and non-ferrous metals accounted
for most of the growth in the value of ex-
ports in January-September 2004. Ex-
ports of machinery, equipment and trans-
port vehicles, natural gas, timber, chemi-
cal raw materials and mineral fertiliser also
increased. According to the latest statis-
tics, the share of energy products in the
total value of exports slightly contracted,
while the share of ferrous and non-ferrous
metals expanded.
Imports grew mostly due to greater
imports of investment goods, which in-
creased by more than 40%. Consumer
goods imports rose by more than 25%
Inflation Review
Third Quarter ♦ 2004
chiefly as a result of growth in the import
of non-food consumer goods and some
foodstuffs.
The terms of Russia's trade with
foreign countries in January-September
2004 improved by an estimated 20-22%
as compared with the same period last
year due to the accelerated growth in ex-
port prices.
The current account surplus in-
creased by an estimated $12.9 billion in
January-September 2004 as compared
with the same period last year and stood
at $40.0 billion, or 9.6% of GDP as against
8.7% of GDP in the first nine months of
2003. The significant increase in exports
was the main reason for growth.
The capital and financial account
deficit (net of the changes in reserves)
rose from $7.6 billion in January-Septem-
ber 2003 to an estimated $14.6 billion in
the first nine months of the year. The pri-
vate sector's net capital outflow increased
to $15.1 billion from $3.9 billion in Janu-
ary-September 2003.
According to preliminary balance of
payments data, the net inflow of foreign
investment to the private sector of the
Russian economy fell to $19.7 billion in
January-September 2004 from $23.3 bil-
lion in the same period last year, as the
banking sector's foreign debt obligations
this year grew less than in the first nine
months of 2003. However, net foreign
capital inflow to the non-financial enter-
prise sector increased to $18.5 billion as
against $18 billion in January-September
2003. Foreign direct investment in the
non-financial enterprise sector declined
slightly and stood at an estimated $8.1 bil-
lion as against $8.3 billion in January-Sep-
tember 2003, while foreign capital inflow
in the form of credits and loans contracted
to $9.3 billion from $10.9 billion. At the
same time, capital inflow in the form of
portfolio investments amounted to $1.2
billion, whereas in January-September
2003 there was a portfolio investment out-
flow of $1.3 billion.
Private capital outflow increased as
investing abroad became more attractive.
Private sector investments in foreign
economies increased to an estimated
$28.9 billion in January-September 2004
as compared with the same period last
year (in January-September 2003, they
were valued at $23.4 billion). At the same
time, capital outflow from the non-finan-
cial enterprise sector increased to $21.2
billion from $17.1 billion in the first nine
months of 2003. The de-dollarisation of
the Russian economy slowed down.
Russia's international reserves
rose by $18.1 billion in January-Septem-
ber 2004 (in the same period last year they
expanded by $14.3 billion) and as of Oc-
tober 1, 2004, they aggregated $95.1 bil-
lion as against $62.1 billion as of Octo-
ber 1, 2003. By the end of last Septem-
ber, Russia had sufficient gold and cur-
rency reserves to finance imports for 9.3
Inflation Review
Third Quarter ♦ 2004
months as compared with 7.7 months a
year earlier.
International financial markets
In the middle of the year, the US Fed-
eral Reserve raised the federal funds rate
for the first time since the middle of 2000.
In June, the US overnight interbank rate
was raised from 1% p.a. to 1.25% p.a.,
while in August it was raised to 1.5% p.a.
and in September to 1.75% p.a. The Fed-
eral Reserve switched to a tighter interest
rate policy during a cyclic surge of the US
economy, which started in November
2001, to curb inflation. The monetary
policy of the Economic and Monetary
Union was neutral to the changes in eco-
nomic conditions in January-September
2004. The European Central Bank has not
changed its key refinancing rate since
June 2003.
LIBOR rates on US dollar-denomi-
nated deposits with terms from one month
to one year rose by 0.1-0.6 percentage
points in January-September 2004 as
compared with the same period last year,
whereas LIBOR rates on euro-denomi-
nated deposits with similar terms fell by
0.1-0.4 percentage points year on year.
The yield on US treasury bonds with ma-
turity from two to ten years rose by 0.4-
0.7 percentage points on average as com-
pared with January-September 2003 and
the yield on similar financial assets in the
eurozone by 0.1-0.2 percentage points.
There was a moderate rise in US in-
terest rates in January-September 2004.
During the first three quarters of the year,
US business activity indices fluctuated sig-
nificantly and slow job growth rates had a
negative effect on economic agents' sen-
timents amid the growing balance of pay-
ments deficit. The accelerated growth of
world oil prices undermined confidence in
the dollar owing to the consumption of
extremely large amounts of oil by the US
economy. As a result, the exchange rate
of the dollar against other major world cur-
rencies in January-September 2004 was
lower than in the same period last year
despite the dollar's significant gains in the
period from mid-February to mid-May
2004.
In the first nine months of the year, the
dollar lost 10.1% on average against the
euro as compared with the same period
last year. The dollar also depreciated
against the Japanese yen, British pound
and many other currencies, including the
currencies of Russia's leading trading
partners, such as the Swiss franc, Danish
krone, Swedish krona, Hungarian forint,
Polish zloty, Czech koruna, Slovak koruna,
Lithuanian litas, Latvian lat, Estonian
kroon, Turkish lira, Kazakh tenge, South
Korea's won and Indian rupee. The only
currencies of Russia's leading trading
partners that fell against the dollar were
the Belarussian ruble and Romanian leu.
The dollar rate against the Ukrainian
hryvnia in January-September 2004 was
Inflation Review
Third Quarter ♦ 2004
virtually the same as in the corresponding
period last year.
Domestic supply and demand
In the first nine months of 2004, con-
sumer price inflation was accompanied by
a high level of production and invest-
ment activity.
The key branch output index in that
period was the same as in the correspond-
ing period of 2003 at 6.9%. At the same
time, the first-half rate of its growth in 2004
was faster than last year (7.9% as against
7.1%). Production growth rates in 2004
Q3 slowed slightly in industry, construc-
tion and transport. At the same time, agri-
cultural output, which declined in 2003 Q3,
increased in 2004 Q3 owing to a bumper
grain harvest. Retail trade turnover in-
creased by 70% year on year. As a result,
the key branch output index gained 5.4%
in July-September 2004, a decrease of
1.1 percentage points as compared with
the same period last year.
Industrial production growth stood at
6.5% in January-September 2004 (7.4%
in January-June) as against 6.8% in the
same period last year (in January-June
2003, it was also 6.8%). The seasonal
slowing of industrial output growth in 2004
Q3 was largely due to the year-on-year
slowdown of production growth in the
electric-power industry (by 3.1 times), fuel
sector (by 1.4 times), ferrous metallurgy
sector (by 2.0 times) and food industry (by
2.1 times). These sectors account for
nearly 50% of overall industrial output.
Despite a minor production slowdown in
the machine-building industry in 2004 Q3
as compared with the same period last
year, output continued to expand rapidly
in this sector (by 8.6%) and nine-month
growth this year was bigger than in 2003
(12.7% against 8.1%).
Transport's freight turnover in Janu-
ary-September 2004 increased by 6.8%
as compared with the same period last
year (January-September 2003 growth
stood at 7.5%). Railways increased their
freight turnover by 8.7%, automobile
transport 4.4% and pipeline transport
7.0%.
Business activity remained high in the
construction branch in January-Septem-
ber 2004. The volume of construction
work done by contract in that period sur-
passed last year's level by 11.1% (14.4%
in the same period of 2003).
Agricultural output increased by 0.1%
in January-September 2004 year on year,
whereas in the same period of 2003 it con-
tracted by 0.2%. However, in the first half
of the year agricultural production de-
clined by 1.2% as against 0.3% in Janu-
ary-June 2003.
Investor and consumer demand
remained high in January-September
2004. Fixed capital investment grew by
11.6% year on year (in January-Septem-
ber 2003, it increased 11.9%). In 2004 Q1,
fixed capital investment rose by 13.1%, in
Q2 12.3% and in Q3 10.3%.
This year, as in the past few years, the
sectors that were the major recipients of
investments were the fuel sector, trans-
port and the housing and amenities sec-
tor. In the first half of the year, these sec-
tors received about 50% of all investments
made by large and medium-sized enter-
prises and organisations (in January-June
2003, these sectors accounted for more
than 56%). As for the structure of the
sources of fixed capital investment, 48.6%
were investors' own funds and 51.4% were
borrowed funds (in the first half of 2003,
the respective percentages were 46.5%
and 53.5%). The share of budget funds
Inflation Review
Third Quarter ♦ 2004
contracted significantly, from 18.4% in the
first half of 2003 to 16.2% in 2004 1H. At
the same time, the share of bank loans
expanded considerably (from 4.8% to
7.3%). This is the highest first-half level
since 1997.
Gross capital formation relative to
GDP, calculated using the income con-
sumption method, increased to 18.5% in
2004 1H from 17% in 2003 1H, mainly due
to the increased share of turnover stocks.
At the same time, gross capital formation
growth slowed slightly year on year. In
2004 Q1, gross capital formation in-
creased by 13.5% on the same period last
year and in 2004 Q2 it increased by 15.6%
as against 15.4% and 19.5% in the same
periods last year respectively.
Real disposable money income in
January-September 2004 rose by 9.8% as
compared with the same period last year
(in January-September 2003, it increased
14.1%). At the same time, in 2004 Q3 real
disposable money income grew by 10.2%
year on year as against 11.4% a year ear-
lier.
The continued increase in household
income led to growth in consumer spend-
ing, which rose by an estimated 11.3% in
January-September 2004 year on year as
against 9.0% in January-September
2003. At the same time, the share of ex-
penses on goods and services in the
structure of household income use ex-
panded in the period under review as com-
pared with January-September 2003.
Consumer expenses grew faster than in-
comes, pushing consumer prices up.
The situation on the labour market
improved in January-September 2004
compared to the same period last year.
There was a fall in the number of jobs in
January-September 2003, whereas in the
same period this year job numbers in-
creased. The number of jobless, which in-
creased in the first nine months of 2003,
declined this year. Of the total economi-
cally active population, 91.9% were gain-
fully employed in January-September
2004 and 8.1% were classified as unem-
ployed according to ILO methodology
Economic growth and inflation
When a target for inflation is set, potential
economic growth (the output of goods and ser-
vices) is evaluated, because output growth at
rates exceeding potential output growth may tes-
tify to oversupply and increased inflationary pres-
sure on the economy. Potential output makes for
economic equilibrium, which does not cause in-
flation to accelerate, and characterises the
economy's supply possibilities. A gap between
actual and potential output is a sign of imbalance.
The output gap is the percentage difference be-
tween actual and potential output.
Potential output is difficult to determine in
Russia because too little time has passed since
the beginning of reforms and because there are
no reliable data for calculating the production
function and mechanical smoothing procedure.
The expert method of determining potential out-
put and the output gap and its impact on price
dynamics is more appropriate for the Russian
economy, taking into consideration its statistical
problems and specifics of the evaluation of pro-
duction factors.
According to the calculated trend, the an-
nual growth of potential output may stand at
6.5%, a rate close to the five-year annual aver-
age. Growth in potential output may be affected
by gradual loading of production capacity and
the productivity factor, which reflects the effect
of scientific and technological progress. Taking
all the above factors into account, one can esti-
mate potential output at 6-8%.
When analysing the changes in the corre-
lation between actual and potential output
growth, the Bank of Russia monitors the state of
the balance of payments in order to be able, if
necessary, to make adjustments to its monetary
and foreign exchange policies to achieve the in-
flation targets.
Inflation Review
Third Quarter ♦ 2004
(91.2% and 8.8% respectively in the first
nine months of 2003). Job numbers in-
creased by an estimated 2% as compared
with January-September 2003, while un-
employment was down 5.3%.
Job growth created conditions for
consumer price increases, but growth in
labour productivity contained this pro-
cess.
Exchange rate
The exchange rate policy pursued by
the Bank of Russia continued to play a
positive role in curbing core inflation. In
September 2004, the nominal rate of the
ruble against the US dollar was 0.7%
higher than in December 2003.
The ruble's nominal rally against the
dollar contained growth in the prices of
imported consumer goods and their do-
mestically manufactured analogues. The
exchange rate dynamics affected non-
food price dynamics more than food price
dynamics. As Russian foodstuffs were
highly competitive on the domestic mar-
ket due to both quality and price, the ex-
change rate largely affected them through
producer prices in the food industry, the
industry that uses imported raw materials
more than any other industry. As for the
non-food price dynamics, the exchange
rate affected them directly owing to the
low competitive power of the domestically
manufactured non-food consumer goods.
Imports accounted for 44% of retail
trade commodity resources in 2004 Q2
and Q1, whereas in 2003 Q1 imports ac-
counted for 46% of retail trade commod-
ity resources and in 2003 Q2 for 43%. As
for foodstuffs, imports accounted for 34%
in 2004 Q1 and Q2 as against 37% in 2003
Q1 and 32% in 2003 Q2.
Estimates indicate that the ruble's
nominal rise in January-September 2004
reduced core inflation growth by about 0.2
percentage points.
Inflation dynamics on the consumer
goods market were affected by price dy-
namics in industries whose output goes
directly to the consumer goods market.
According to estimates, producer price
growth in these industries accounted for
4.8 percentage points of growth in the
prices of goods and services included in
the core inflation calculation in January-
September 2004. Price dynamics in these
industries were accompanied by growth in
production costs. Production cost dy-
namics were the result of growth in indus-
trial producer prices , which rose by
23.3% in September 2004 as compared
with December 2003 (they increased
10.5% in the same period last year). Rapid
growth in industrial producer prices was
caused by growth in the world prices of
energy products and other raw materials.
The most significant growth in pro-
ducer prices in January-September was
registered in the ferrous metallurgy sec-
tor (55.3% as against 25.0% in the same
period last year) and fuel sector (54.2%
as against 5.0%). At the same time, pro-
Inflation Review
Third Quarter ♦ 2004
ducer prices in the electric-power indus-
try grew less than last year (11.7% as
against 13.7%).
Overall, analysis shows that in the long
term industrial producer price growth and
consumer price growth slow at almost the
same pace, despite their different short-
term dynamics. In September 2004, in-
dustrial producer prices increased by 4.9
times as compared with December 1997
and consumer prices rose also as much
over that period (five times).
Growth in freight transportation
charges in September 2004 stood at
11.4% as compared with December 2003
as against 20.5% in the same period last
year. At the same time, railway fares in-
creased by 12.6% as against 26.5% in the
same period of 2003.
Wages and salaries increased at
fairly rapid rates in January-September
2004, faster than labour productivity.
Moreover, the gap between the rates of
growth in real wage and labour productiv-
Inflation Review
Third Quarter ♦ 2004
ity widened compared to the same period
last year, creating conditions for further
price growth.
The trend of real wage growth rates
exceeding GDP growth rates as compared
with 1997 Q4, which emerged in 2003 Q4,
continued in 2004. At the same time, the
dynamics of real pensions continued to lag
behind GDP growth and have not yet re-
covered to the 1997 Q4 level. The excess
of real wage growth over production
growth amid the widening gap between
labour productivity and wage dynamics is
a factor of additional inflationary pressure
on the economy.
The average monthly nominal imputed
wage in January-September 2004 stood
at 6,590 rubles as against 5,214 rubles in
the same period last year, an increase of
25.3%. In real terms, this wage increased
by 13.3% as against 9.1% in the same pe-
riod last year.
As in the past few years, significant
wage differences between various sectors
of the economy remained. As before,
wages were the highest in the fuel and
non-ferrous metallurgy sectors and in the
sphere of finance, credit and insurance,
and the lowest were in the social sphere
(education, culture and the arts and
healthcare), agriculture and light industry.
At the same time, the most significant
year-on-year growth in the average
monthly wage this year was registered in
healthcare, physical culture and social
security and culture and the arts. Wage
growth rates in the electric-power indus-
try and the fuel sector were a little slower
than in the social sphere, but they were
roughly the same as in industry as a whole.
Despite increased costs, there was no
acceleration of price growth in the light
and food industries, whose output goes
directly to the consumer goods market.
One reason for this was the efforts made
by enterprises in these industries to retain
control over their markets. In January-
September 2004, producer price growth
in the food industry slowed by 0.1 percent-
age points year on year (to 8.5% as against
8.6%) and in light industry to 6.3% as
against 9.2%. At the same time, the rate
of profitability of large and medium-sized
enterprises in the light and food industries
in 2004 1H stood at 7.3% and 2.6% re-
spectively against 7.8% and 0.5% in Janu-
ary-June 2003.
Other factors
In the first nine months of the year,
Russia continued to maintain a budget
surplus, which restrained borrowings on
the domestic market and inflation growth.
According to Finance Ministry data,
federal budget revenue stood at 20.1% of
GDP in January-September 2004, expen-
diture 15.2% and the federal budget sur-
plus 4.9% as against 2.5% in the same
period last year.
Relatively low inflationary expecta-
tions were a major factor responsible for
slowing price growth. According to sur-
veys conducted by the Russian
Government's Centre for Economic Stud-
ies, the inflationary expectations of man-
agers at key industrial enterprises in Janu-
ary-September 2004 were lower than in
the same period last year. Price growth in
the near future was predicted during that
period by 29-34% of respondents as
against 31-35% in January-September
2003.
The structure of interest rates on the
financial instruments with different matu-
rity periods remained balanced in Q3, de-
spite fluctuations in the demand for money
and its supply and interest rate volatility on
Inflation Review
Third Quarter ♦ 2004
the money market. The yield curves of
major financial instruments tended to rise,
reflecting the stable nature of Russian fi-
nancial market players' inflationary expec-
tations.
The rate of production capacity
utilisation affects, to a certain extent, in-
flation dynamics in the economy. Accord-
ing to surveys of managers at key indus-
trial enterprises, the average rate of pro-
duction capacity utilisation in September
was 59% and posed no serious threat of
the acceleration of inflation. The highest
rates of production capacity utilisation
were registered in the fuel sector (83%),
ferrous metallurgy sector (78%) and
wood-paper industry (73%), and the low-
est in machine-building and metalworking
(50%), light industry (51%) and the food
industry (54%).
At present, there is a backlog of un-
used production capacity, which can be
utilised if demand for traditional goods
rises or new products are manufactured.
Inflation Review
Third Quarter ♦ 2004
2 Capital consumption is the ratio of depreciation deductions for renovation (recovery) to the original cost of fixed assets.
3 The rate of fixed capital renovation is calculated as the ratio of the cost of putting basic production assets into operation to their
availability as of the end of the year.
On the state of production capacity in the
light and food industries
The rate of capital consumption2 in light in-
dustry has been high in recent years, preventing
the industry from turning out high-quality prod-
ucts. As of the beginning of 2003, it stood at
48.8%, lower than in industry as a whole (53%).
Of all industries, light industry has the lowest rate
of fixed capital renovation
3 (0.4). It is 4.5 times
lower than in industry as a whole. According to
surveys conducted by the Russian Government's
Centre for Economic Studies (CES), light indus-
try has one of the lowest rates of production ca-
pacity utilisation in industry (51%).
Domestically produced goods cannot al-
ways compete with their imported counterparts
in terms of quality. As a result, output has de-
clined in the past few years (2002-2004) despite
growth in household income. However, surveys
conducted by the CES indicate that evaluations
of the competitiveness of light industry products
in 2004 has improved a little as compared with
the previous year, but it remains low nonethe-
less. In 2003 Q1, just 6% of light industry factory
managers evaluated their competitiveness on the
domestic market as high and in 2004 Q1 their
share increased by 4 percentage points to 10%.
In 2004 Q1, as in 2003 Q1, the managers of only
2% of the enterprises surveyed evaluated their
competitiveness on the CIS market as high.
The rate of capital consumption in the food
industry stood at 35.7% as of the beginning of
2003 and was lower than in industry as a whole
(53%). The rate of fixed capital renovation in the
food industry was 2.9, or 1.6 times higher than in
industry as a whole. The rate of production ca-
pacity utilisation in the food industry is low - 54%,
according to CES data (as against 59% in indus-
try as a whole).
However, continuing demand allowed food
industry enterprises to boost output at a fairly
rapid rate. According to the CES's surveys, in
2004 Q1 the competitiveness of the food
industry's output decreased as compared with
the same period last year. In 2003 Q1, the man-
agers of 29% of food industry enterprises evalu-
ated their competitiveness on the domestic mar-
ket as high, whereas in 2004 Q1 their share con-
tracted by 12 percentage points to 17%. The
number of managers who evaluated the competi-
tiveness of their enterprises as high on the CIS
market also declined, from 11% in 2003 Q1 to
2% in 2004 Q1.
Inflation Review
Third Quarter ♦ 2004
The dynamics of monetary indicators in
2004 Q3 were affected by demand for for-
eign currency-denominated assets, slowing
economic growth and the increased influ-
ence of the budget due to the expansion of
the Stabilisation Fund.
A trend towards slowing growth in
monetary indicators which emerged in
March 2004 continued in the third quarter
of the year. In September, M2 growth rates
slowed to an annualised 35.4% from 47.7%
a year earlier. In 2004 Q3 as a whole, money
supply grew less than in the previous quar-
ter owing to seasonal factors and its growth
rate stood at 1.1% as against 4.8% in 2003
Q3. July saw an uncharacteristic contraction
of the ruble supply and in August the ruble
supply’s rate of growth was considerably
slower than the monthly average of the past
few years.
M2 growth rates in the last month of
the quarter were close to those of the past
two years, a process that may indicate an
end to the trend towards the slowing of M2
growth.
The accelerated and prolonged (since
2003) growth of the ruble supply
(annualised M2 growth rates) created a cu-
mulative effect that pushed prices up. Since
there is a lag between money supply growth
and core inflation, this pressure reached a
peak in the third quarter of the year (July-
October). However, inflation’s reduced sus-
ceptibility to changes in the dynamics of
monetary indicators, on the one hand, and
the contraction of core inflation’s contribu-
tion to consumer price growth, on the other,
affected actual consumer price inflation,
which slightly exceeded the projected rate.
Although consumer price growth acceler-
ated year on year, core inflation in the 12-
month moving period only slowed in Sep-
tember, as money supply growth continued
to bring pressure to bear on the general rate
of inflation.
Monetary Indicators
Inflation Review
Third Quarter ♦ 2004
Slowing growth in the ruble supply, reg-
istered from March to August, will reduce
its pressure on core inflation in the first half
of the next year. At the same time, the sig-
nificant and rapid reduction of M2 growth
after a long period of acceleration may serve
as an indication that core inflation growth
due to the increased money supply is hardly
possible in the medium term.
The gap between M2 and GDP growth
rates, which characterises the part of mon-
etary growth that exceeded the level nec-
essary to finance the increased amount of
transactions, grew considerably narrower in
Q3 and reached the 2003 Q1 level. Since this
gap can influence inflation, it is important
that in interpreting it, one should evaluate
correctly the dynamics of the velocity of the
economically sound path.
The greater-than-expected fall in M2
velocity in the first half of the year contained
price growth, balancing out the correlation
between the expansion of the money sup-
ply and economic growth. Instability in the
demand for the domestic currency affected
the dynamics of money velocity: its reduc-
tion slowed down significantly in the third
quarter (to 1.9%), whereas in the previous
four quarters it declined at an average quar-
terly rate of 4.6%.
The slowing of annualised rates of
growth in the third quarter was character-
istic, above all, of the ruble monetary ag-
gregates (M0, M1 and M2). One factor be-
hind this process was economic agents’ in-
creased demand for foreign exchange,
caused by the ruble’s nominal depreciation
against the dollar and the after-effects of
instability in the banking sector. This af-
fected the dynamics of aggregates, includ-
ing non-financial agents’ foreign currency-
denominated assets. The rate of growth of
M2X, the aggregate comprising non-cash
foreign exchange, slowed from an
annualised 35.2% as of July 1, 2004, to 29%
as of October 1, 2004. It was less significant
than the slowing of M2 growth. M2X
growth rates were slightly faster than M2
growth rates (by one percentage point)
from the beginning of the year due to con-
siderable growth in the value of foreign cur-
rency deposits, which grew faster than ruble
deposits (by 6.1% as against 0.9%) in July-
September 2004. Foreign cash expanded
even more significantly, a process evidenced
by the dynamics of broader contingent ag-
Inflation Review
Third Quarter ♦ 2004
gregate M2Y, which comprises an estimated
amount of foreign exchange in the non-fi-
nancial enterprise and household sector.
According to preliminary balance of pay-
ments data, the value of foreign exchange
in the non-financial enterprise and house-
hold sector increased by $1.2 billion in 2004
Q2 and Q3, whereas in the same period of
2003 it contracted by $4.2 billion.
Although the annualised M2Y aggre-
gate did not go down from January to Au-
gust, it was below last year’s level. In Sep-
tember, the M2Y growth rates slowed to an
annualised 26% (as against 19.6% a year
earlier) amid the ruble’s nominal rise against
the dollar and decline in the demand for for-
eign exchange.
The most significant influence on con-
sumer prices is exerted by transaction
money, which has a high level of liquidity
and shorter lags of influence unlike less liq-
uid components of the money supply. The
rate of growth of the M1 aggregate (the
most liquid components of the money sup-
ply), which reflects the economic conditions
at home and abroad and economic agents’
preferences, slowed in 2004 Q3 from
33.9% to 29.2%.
The rates of growth in funds in ac-
counts and demand deposits slowed to 23%
in September from 27.8% in June and were
considerably slower than in September 2003
(44.5%). Moreover, in 2004 Q3 these funds
contracted in absolute terms. The fall was
partly due to the seasonal slowing of growth
in corporate current accounts in the first
month of the quarter, which was stimulated
by the crisis of confidence in the banking
sector, and the decrease of funds in per-
sonal demand deposits throughout the
quarter.
Inflation Review
Third Quarter ♦ 2004
The outflow of ruble funds from bank
accounts was stimulated by growth in
household sector demand for foreign ex-
change and changed preferences. As the
nominal rate of the ruble against the dollar
declined in 2004 Q2 and Q3, net purchases
of foreign exchange by the household sec-
tor began to increase in April and rose
sharply in July as banks were hit by the crisis
of confidence. In July-September they
amounted to more than $5.7 billion as
against $1.8 billion in the same period last
year and this determined the cash ruble dy-
namics.
By the beginning of October, cash
growth rates were slower than in Q3 (35.2%
as against 42.4% on an annualised basis).
In July-September, cash expanded by 1.4%
in volume, a rate considerably slower than
the Q3 average of the previous years. The
fall in M0 growth also came as a result of
slightly slower growth in household income,
which grew less than in the same period last
year.
M0’s moderate growth in Q3 had no
stimulating effect on consumer prices in the
short term.
The slowing of M0 growth this year was
not accompanied by any significant con-
traction of its share in the M2 structure (as
of October 1, 2004, it accounted for 34.7%,
i.e., was virtually unchanged from a year
earlier). This may indicate, to some extent,
that the expanding retail trade turnover is
mostly serviced by cash and that the con-
sumer still prefers to use cash as a means of
payment.
Against the backdrop of the downward
trends in the dynamics of cash and funds in
Inflation Review
Third Quarter ♦ 2004
transaction accounts, the rates of growth
in the money aggregate in the monetary
survey definition (similar to M1) slowed to
29.1% by the end of 2004 Q3 from 43.8%
a year earlier. As for the dynamics of the
quasi-money aggregate, the savings com-
ponent of the money supply in the monetary
survey definition (M2X), the downward
trend that emerged at the beginning of
2003 resumed at the end of Q2 and gained
ground: by October 1, 2004, the annualised
rate of growth in quasi-money slowed to
29% from 42.2% a year earlier.
The quasi-money aggregate comprises
funds used by economic agents as savings,
i.e., less liquid components of the money
supply, which represent the absorption ele-
ment with smaller potential and a longer lag
of influence on prices. The rate of growth
in these funds slowed owing to the similar
dynamics of the ruble and foreign currency
components. In 2004 Q3, the rates of
growth in time ruble deposits (4%) and for-
eign currency deposits (6.1%) were slower
than in 2004 Q2 and 2003 Q3.
The significant slowing of growth in
time deposits in the national currency was
connected with the outflow of household
sector funds from the banking system,
caused by the erosion of public confidence
in this system and the changed preferences
for the currency of savings. As a result, a
long-term trend towards accelerated
growth in time deposits in rubles (mostly
household deposits) came to a halt but
started to gain ground again in August and
September. In the meantime, the non-fi-
nancial enterprise sector’s time deposits
continued to grow as enterprises’ incomes
increased and their financial standing im-
proved.
As a result, although foreign currency
deposits increased faster than time depos-
its in rubles, as in Q2, the structure of quasi-
money changed little in July-September. The
share of the foreign currency component in
the money supply structure in the monetary
survey definition (M2X) as of October 1,
2004, expanded by half a percentage point
to 19.6%. The ruble component of quasi-
money continued to predominate in M2X
(28.3% as of October 1, 2004, as against
27.7% as of July 1, 2004). In the medium
term (compared to 2003 Q3), a trend to-
wards national currency having a greater
share in quasi-money was more evident: the
Inflation Review
Third Quarter ♦ 2004
share of the household and corporate sec-
tors’ time deposits in rubles expanded by
nearly four percentage points, while that of
foreign currency deposits contracted almost
as much.
The dynamics of the foreign currency
component of broader contingent aggre-
gate M2Y, which comprises both cash and
non-cash foreign currency funds, mainly
reflect the flow of economic agents’ funds
from ruble to foreign currency assets. As the
annualised rates of growth in time deposits
in rubles and foreign currency deposits
slowed, the rates of growth in foreign cash
started to accelerate steadily in the second
quarter of the year.
The third quarter saw a significant rise
in economic agents’ demand for foreign
exchange, caused by the changed exchange
rate dynamics, banking sector problems and
devaluation expectations. In July and Au-
gust, the household sector purchased record
amounts of foreign exchange and in July-
September the amount of foreign exchange
in the non-financial enterprise and house-
hold sector expanded by $900 million, ac-
cording to a balance of payments estimate
(in 2004 Q2 it grew by $300 million and in
2004 Q1 it decreased by $3.2 billion).
As a result, the share of foreign ex-
change in broader aggregate M2Y ex-
panded slightly in 2004 Q3 (by 1 percent-
age point to about 48%), but it was con-
siderably smaller (by almost 10 percentage
points) than in 2003 Q3.
The corporate and household sector’s
ruble and foreign currency funds drawn by
banks for various terms (on the one hand,
these funds absorb some of the money sup-
ply and on the other hand, they serve as the
basis for the expansion of lending volumes)
increased by 76.4 billion rubles in July-Sep-
tember 2004. Slower growth in the funds
drawn by banks in 2004 Q3 (2.3% as against
8% a year earlier) was not accompanied by
corresponding reduction in the real sector’s
obligations to the banking sector, which
stimulate the expansion of aggregate
money supply.
The increase of the banking sector’s
claims on the non-financial sector of the
economy in 2004 Q3 was a major source of
growth in the money supply: in July-Sep-
tember 2004 it amounted to 246.7 billion
rubles, while M2X expanded by 94 billion
rubles.
At the same time, the dynamics of
monetary indicators were affected by the
continued growth of banking sector net for-
eign assets, mainly caused by the Bank of
Russia increasing its foreign exchange re-
serves. Meanwhile, the accumulation of
funds in the general government’s accounts,
caused by the expansion of the Stabilisation
Fund, had a serious restraining effect on
money supply growth.
The accumulation of budget funds in
Bank of Russia accounts has a two-pronged
effect on the dynamics of monetary indi-
cators. On the one hand, the expansion of
the Stabilisation Fund to its base level of 500
Inflation Review
Third Quarter ♦ 2004
billion rubles, which is taking place this year,
has a medium-term sterilisation effect, con-
taining growth in the money supply created
by a massive inflow of export earnings to
the country. On the other hand, the increase
in the budget fund balances, unaccounted
for in the Stabilisation Fund, may only be
regarded as a short-term factor of absorp-
tion, as it carries the risk of recurrent sharp
growth in expenditures at the end of the
year, which may cause the inflation rate to
accelerate at the beginning of the next year.
In the final analysis, although the cur-
rent path of monetary indicators shows that
money supply growth will not cause core
inflation to accelerate in the coming period,
it creates uncertainty about the future sta-
bility of the dynamics of monetary indica-
tors. In addition to the marked restraining
effect of the Stabilisation Fund and Bank of
Russia sterilisation measures on money sup-
ply dynamics, a major role in slowing growth
in the ruble supply was played by the in-
creased outflow of capital, mainly in the
form of the changed preferences for the
currency of assets. Therefore, as confidence
in the national currency and banking sector
is gradually restored and strengthened and,
consequently, the process of de-
dollarisation intensifies, it will be important
in the coming period to preserve the struc-
ture of the money supply that formed in
2003 and the first quarter of 2004 by ex-
panding the share of its low-liquidity ruble
components.
Inflation Review
Third Quarter ♦ 2004
The term structure of interest rates
on ruble-denominated financial instru-
ments with different maturity periods
was determined in the third quarter of
the year by fluctuating money supply
and demand for money. The principal fac-
tors that affected the level of financial mar-
ket interest rates in the period under review
were a relatively high level of banking sec-
tor liquidity, increased borrowings on the
GKO-OFZ market and stability of the nomi-
nal dollar/ruble exchange rate.
In the third quarter of the year when the
average quarterly level of commercial banks’
liquidity increased, interest rates declined on
ruble interbank loans with almost all terms.
As interest rates on loans with terms up to a
month decreased significantly, the inter-
bank yield curve became more abrupt while
retaining its rising slope. Interest rates on the
longest-term loans changed less. The term
structure of interbank interest rates in
July-September continued to reflect the
relatively low and stable level of market
players’ inflationary expectations.
The yield curve of banks’ lending opera-
tions in the third quarter of the year became
more salient while retaining a positive slope
in the sector of up to six months, whereas
the negative slope of the yield curve in the
longer-term sector increased. The fall in in-
terest rates on operations with terms longer
than six months in July-September caused
this sector of yield curve to move down-
wards. The shape of the yield curve of
banks’ lending operations can be re-
garded as evidence of the persistent ex-
pectations of a further moderate decline
in interest rates in this segment of the
Russian market in the medium-term
only and following a possible slowing of
inflation.
As turnovers on the secondary govern-
ment securities market increased slightly,
the average quarterly yield on domestic gov-
ernment debt instruments rose by 0.2 per-
Financial Market Indicators
Inflation Review
Third Quarter ♦ 2004
centage points quarter on quarter. The
GKO-OFZ yield curve retained its rising slope
in 2004 Q3. At the end of September, the
yield on government bonds with all matu-
rity periods was lower than in June and the
yield curve’s slope increased due to a quicker
fall in the yields on papers with maturity
periods up to four years. No inflation risk
premium was included in the price of
short-term government bonds while the
ensuing yield level was determined by the
structure of demand on the money market.
The medium- and long-term inflationary
expectations of market players were un-
changed from the previous quarter. Invest-
ments in medium-term government
bonds are susceptible to moderate infla-
tion risk. The risks involved in papers
with terms to redemption longer than
five years were determined by market
players by evaluating risks involved in
medium-term issues.
GKO-OFZ secondary market turnovers
increased to $940 million a day in Q3 as
against $900 million a day in Q2. While
banking sector liquidity levels remained
high, the structure of turnover changed sig-
nificantly, especially as a result of the Fi-
nance Ministry’s massive placements and
additional placements of medium- and
long-term OFZ issues. The share of govern-
ment bonds with terms to redemption up to
three months contracted from 8.7% in Q2
to 2.9% in Q3, the share of government
bonds with terms from three months to a
year decreased from 4.8% to 3.2%, while
the share of medium- and long-dated pa-
pers in the secondary government bond
market turnover expanded from 86.5% to
94%. The GKO-OFZ turnover structure in
July-September reflected the change of
priorities of government securities mar-
ket players amid persistent relatively
low inflationary expectations.
* * *
An analysis of the term structure of in-
terest rates in the surveyed segments of the
financial market shows that the price indi-
cator volatility of major ruble-denominated
financial instruments was moderate in the
third quarter of the year. In that situation,
the yield curves of the main ruble instru-
ments on the Russian market retained their
Inflation Review
Third Quarter ♦ 2004
informative importance, especially as an in-
dicator of the inflationary expectations of
market players.
There were no serious imbalances in the
interest rate structure by instrument with
different maturity periods. The yield curves
of key financial instruments mostly had
a rising slope, reflecting the stable na-
ture of the short- and medium-term in-
flationary expectations of Russian fi-
nancial market players.
Long-term inflationary expectations
cannot be evaluated accurately owing to the
small scale of operations with long-term fi-
nancial instruments. That the yield curves
of the various longest-term instruments
remained almost flat in the third quar-
ter of the year may testify to a certain
degree of inertia in market players’ ex-
pectations.
Inflation Review
Third Quarter ♦ 2004
Statistical Addendum
Consumer price dynamics by group of goods
and services (month on month, %)
Monthly
inflation Food price growth
Growth in food
prices, excluding
vegetable prices
Vegetable and
fruit price
growth
Non-food price
growth
Core
inflation
Service price
growth
January 2.4 2.5 1.3 13.1 1.1 1.2 4.4
February 1.6 1.2 0.8 4.1 0.9 0.9 4.2
March 1.1 1.0 0.6 3.9 0.8 0.7 1.7
April 1.0 1.0 0.5 4.2 0.6 0.6 1.8
May 0.8 0.7 0.4 2.5 0.6 0.6 1.5
June 0.8 0.8 0.6 2.3 0.5 0.6 1.2
July 0.7 0.4 0.7 -1.8 0.5 0.7 1.9
August -0.4 -1.4 0.8 -17.2 0.6 0.7 0.7
September 0.3 -0.2 1.1 -11.2 0.9 1.1 0.9
October 1.0 1.1 1.8 -5.6 1.0 1.4 0.8
November 1.0 1.2 1.3 1.0 0.8 1.1 0.4
December 1.1 1.5 1.2 4.1 0.6 1.0 0.9
Full year (December
on December)
12.0 10.2 11.8 -4.2 9.2 11.2 22.3
January 1.8 1.6 1.3 5.5 0.5 0.9 4.1
February 1.0 1.1 1.1 1.5 0.4 0.8 1.6
March 0.8 1.1 0.9 2.8 0.4 0.7 0.6
April 1.0 0.8 1.0 -0.6 0.6 0.8 2.0
May 0.7 0.4 0.5 -0.7 0.8 0.6 1.4
June 0.8 0.8 0.4 4.8 0.7 0.5 0.9
July 0.9 1.0 1.0 1.5 0.6 0.8 1.3
August 0.4 0.1 0.8 -6.3 0.5 0.7 1.0
September 0.4 0.0 0.9 -9.0 0.9 0.9 0.6
Inflation Review
Third Quarter ♦ 2004
Consumer price dynamics by group of goods and services
(on accrual basis since start of year, %)
Inflation
over period Food price growth
Growth in food
prices, excluding
vegetable prices
Vegetable and
fruit price
growth
Non-food price
growth
Core
inflation
Service price
growth
January 2.4 2.5 1.3 13.1 1.1 1.2 4.4
February 4.1 3.7 2.2 17.8 2.0 2.1 8.8
March 5.2 4.8 2.8 22.4 2.8 2.8 10.6
April 6.2 5.8 3.3 27.6 3.5 3.4 12.6
May 7.1 6.5 3.8 30.8 4.1 4.0 14.2
June 7.9 7.4 4.4 33.7 4.6 4.7 15.6
July 8.7 7.8 5.1 31.4 5.1 5.4 17.8
August 8.3 6.3 6.0 8.7 5.7 6.2 18.7
September 8.6 6.1 7.1 -3.4 6.6 7.3 19.7
October 9.7 7.3 9.1 -8.9 7.7 8.9 20.7
November 10.8 8.6 10.4 -7.9 8.6 10.1 21.2
December 12.0 10.2 11.8 -4.2 9.2 11.2 22.3
January 1.8 1.6 1.3 5.5 0.5 0.9 4.1
February 2.8 2.8 2.3 7.1 0.9 1.7 5.8
March 3.5 3.8 3.2 10.1 1.4 2.4 6.4
April 4.6 4.7 4.2 9.5 2.0 3.2 8.5
May 5.3 5.2 4.8 8.7 2.8 3.8 10.0
June 6.1 6.0 5.2 13.9 3.4 4.3 11.0
July 7.1 7.1 6.2 15.6 4.0 5.1 12.5
August 7.6 7.2 7.1 8.3 4.6 5.8 13.6
September 8.0 7.2 8.0 -1.4 5.5 6.8 14.3
Inflation Review
Third Quarter ♦ 2004
Inflation Growth Structure
Inflation growth over period since start of year due to changes
in prices by group of goods and services
Foodstuffs* Non-food
products Core inflation Paid
services
Vegetables and
fruit
Inflation over
period, %
January 0.7 0.3 1.0 0.8 0.7 2.4
February 1.1 0.5 1.7 1.5 0.9 4.1
March 1.4 0.8 2.3 1.8 1.2 5.2
April 1.7 1.0 2.8 2.2 1.4 6.2
May 1.9 1.1 3.3 2.4 1.6 7.1
June 2.2 1.3 3.8 2.7 1.8 7.9
July 2.6 1.4 4.4 3.1 1.6 8.7
August 3.0 1.6 5.0 3.2 0.5 8.3
September 3.6 1.8 6.0 3.4 -0.2 8.6
October 4.5 2.1 7.2 3.5 -0.5 9.7
November 5.2 2.4 8.2 3.6 -0.4 10.8
December 5.9 2.5 9.1 3.8 -0.2 12.0
January 0.6 0.1 0.8 0.7 0.3 1.8
February 1.2 0.2 1.4 1.0 0.4 2.8
March 1.6 0.4 2.0 1.1 0.5 3.5
April 2.1 0.5 2.6 1.4 0.5 4.6
May 2.4 0.8 3.1 1.7 0.4 5.3
June 2.6 0.9 3.5 1.9 0.7 6.1
July 3.1 1.1 4.2 2.1 0.8 7.1
August 3.5 1.3 4.7 2.3 0.4 7.6
September 4.1 1.5 5.5 2.5 -0.1 8.0
* Excluding vegetables and fruit.
Inflation Review
Third Quarter ♦ 2004
Monthly inflation growth rate due to changes
in prices by group of goods and services
Foodstuffs* Non-food
products Core inflation Paid
services
Vegetables and
fruit
Inflation over
month, %
January 0.7 0.3 1.0 0.8 0.7 2.4
February 0.4 0.2 0.7 0.7 0.2 1.6
March 0.3 0.2 0.6 0.3 0.2 1.1
April 0.3 0.2 0.5 0.3 0.3 1.0
May 0.2 0.2 0.4 0.3 0.2 0.8
June 0.3 0.1 0.5 0.2 0.1 0.8
July 0.3 0.1 0.5 0.4 -0.1 0.7
August 0.4 0.1 0.6 0.1 -1.1 -0.4
September 0.5 0.2 0.9 0.2 -0.6 0.3
October 0.9 0.3 1.2 0.1 -0.3 1.0
November 0.6 0.2 0.9 0.1 0.0 1.0
December 0.6 0.2 0.8 0.2 0.2 1.1
January 0.6 0.1 0.8 0.7 0.3 1.8
February 0.5 0.1 0.6 0.3 0.1 1.0
March 0.4 0.1 0.6 0.1 0.1 0.8
April 0.5 0.2 0.6 0.4 0.0 1.0
May 0.3 0.2 0.5 0.3 0.0 0.7
June 0.2 0.2 0.4 0.2 0.3 0.8
July 0.5 0.1 0.6 0.2 0.1 0.9
August 0.4 0.2 0.5 0.2 -0.4 0.4
September 0.5 0.3 0.7 0.1 -0.5 0.4
* Excluding vegetables and fruit.
Inflation Review
Third Quarter ♦ 2004
Contribution to Inflation Growth
Contribution to inflation growth over period since start of year
by group of goods and services
Foodstuffs* Non-food products Core inflation Paid services Vegetables and
fruit
January 27.5 12.4 40.6 31.6 28.5
February 26.7 13.4 41.8 37.1 22.8
March 27.3 14.9 44.2 35.3 22.5
April 27.0 15.3 44.9 34.7 23.1
May 26.9 15.9 46.1 34.5 22.7
June 28.1 16.0 47.9 33.7 22.2
July 29.7 16.2 50.2 35.2 18.8
August 36.5 19.1 60.7 38.9 5.5
September 41.6 21.2 69.1 39.3 -2.1
October 46.7 21.6 74.3 36.4 -4.7
November 48.5 21.7 76.3 33.6 -3.8
December 49.1 21.0 75.9 31.7 -1.8
January 35.8 7.6 43.2 40.3 16.3
February 42.3 9.0 50.0 35.4 13.3
March 45.0 10.3 55.3 30.2 14.5
April 46.1 11.7 57.5 31.5 10.7
May 45.2 14.2 58.5 32.2 8.5
June 42.2 15.3 57.2 30.7 11.8
July 43.4 15.4 58.8 29.9 11.3
August 46.9 16.6 62.6 30.8 5.7
September 50.8 19.1 68.4 30.9 -0.9
* Excluding vegetables and fruit.
Inflation Review
Third Quarter ♦ 2004
Contribution to inflation growth over month
by group of goods and services (%)
Foodstuffs* Non-food products Core inflation Paid services Vegetables and
fruit
January 27.5 12.4 40.6 31.6 28.5
February 25.5 15.0 43.7 45.0 14.6
March 29.7 20.3 53.0 28.3 21.7
April 25.5 17.2 48.7 31.6 25.7
May 25.9 21.2 55.3 33.1 19.8
June 38.4 16.6 62.7 26.9 18.1
July 46.8 18.9 74.7 50.7 -16.4
August Estimate impossible for negative value
September 164.8 72.9 270.6 50.5 -188.3
October 86.6 25.6 114.6 14.2 -26.4
November 63.8 23.3 94.1 8.4 4.5
December 53.8 14.2 71.7 15.1 16.9
January 35.8 7.6 43.2 40.3 16.3
February 53.5 11.5 61.8 26.8 8.1
March 54.6 14.8 74.3 11.5 19.2
April 49.6 17.1 65.1 36.3 -2.9
May 39.1 30.1 64.9 36.2 -5.4
June 22.8 22.7 48.2 21.0 33.6
July 50.6 15.8 68.1 24.8 8.8
August 101.4 35.8 122.3 46.0 -83.2
September 116.9 63.8 164.9 34.1 -114.8
* Excluding vegetables and fruit.
Inflation Review
Third Quarter ♦ 2004
Inflation Review
Third Quarter ♦ 2004
Inflation Review
Third Quarter ♦ 2004
Inflation Review
Third Quarter ♦ 2004
Inflation Review
Third Quarter ♦ 2004
Inflation Review
Third Quarter ♦ 2004
© The Central Bank of the Russian Federation, 2004
Research and Information Department