There is no reason for price explosion in 2017

16 february 2017 | TV Zvezda

Elena Kovaleva, expert of the Analytical Centre, talked about food inflation, outcomes in the event of the sanctions lifting, and what the major grocery retail chains and their customers might expect, on "Zvezda" ("Star") TV Channel

Elena Kovaleva
Elena Kovaleva
Department for Competition Policy

In 2014-2015, after Russia imposed the food import embargo, the retail grocery prices started soaring. Do you think the prices are going to rise just as rapidly in 2017?

Elena Kovaleva: Food inflation rate in the domestic market increased sharply in 2015 after Russia imposed the so-called counter-sanctions and the Russian national currency depreciated. Then we saw a sustained slowdown of the inflation rates. On the whole, in 2015, food price index (including soft drinks) went up by an average of 20.2 percentage points when set against the 2014 level, while the year before the increase of 9.7 percentage points had been evidenced.  In 2016, consumer prices rose by a total of 5.4%. At the same time prices for some groceries actually fell, which for the most part was a result of falling demand resulting from the depreciation of the national currency and a decline in the real household income. In 2017, there is no reason to expect price explosion; the price of the minimal consumer food basket is likely to increase insignificantly.

And what if the government lifts the food import embargo in response to the lifting of the western sanctions, will it change the grocery prices?

Elena Kovaleva: Imported products were replaced with domestic equivalents in 2014-2015 not only because of the embargo but also due to the ruble prices of imported items appreciation. So even if the sanctions are lifted, it will not allow to assure the mass demand for imported items given that their prices will remain relatively high. However, it goes without saying that if supply of the goods in the market goes up,  it is expected to put a downward pressure on the prices. But the drop in prices is going to be marginal. In addition, an important factor that still persists in limiting demand is the falling real household income. According to a study conducted by the Romir research holding, the real household income in Russia (i.e. income adjusted for inflation) in December 2016 was the lowest in the past 5 years of observations. And this year household spending went up set against last December by just 4.3% while the annual inflation rate has been 5.4%.

The present situation in the economy does not suggest a quick recovery of demand in the food markets. There is good reason to believe that the demand pattern will shift both towards cheaper groceries and between different categories of food categories (replace fish with meat, and beef and pork with chicken). Consumers are already economizing on cheeses and sausages, meat and poultry, fruits, fish and sea foods to save money. Traditionally, there is less saving on bread, bakery products, cereals and pasta. Under the current conditions the increase in prices for alimentary products is going to drive the demand shrank even further.

Can you estimate the impact of inflation on the rate at which consumer prices are growing?

Elena Kovaleva: Inflation just represents the rate consumer prices increase; it is estimated on the basis of the change in the prices for alimentary products, non-food goods and paid services offered to the public. In 2016, annualized inflation was 5.4% across all categories of goods and services, with grocery prices going up by an average of 4.6%, non-food items going up by 6.5%, and services increasing in price by 4.9%. In other words, last year it was non-food goods such as fabrics, clothes, footwear, detergents, perfumes, furniture, utensils, consumer electronics, construction materials, etc. that contributed the most to the overall price appreciation.  

What do you think will be the reaction among the major grocery retail chains to the possible lifting of the embargo? Would they switch to foreign suppliers?

Elena Kovaleva: The food embargo imposing coupled with the depreciation of the ruble drastically changed the situation in the market. Some foreign brands as well as Russian companies that specialized in selling imported items left the market or significantly reduced their market share. The existing companies operating in the meat, fish and sea foods markets saw their market shares increase somewhat. New small domestic cheese manufacturers entered the market. Major retail chains expanded the range of house brands in the low price segment, such as Krasnaya Tsena (“Bargain Price”, Pyaterochka), Perekrestok (“Crossroads”, X5 Retail Group NV), Lakomo (“Yummy”, Ashan), 365 Dney (“365 Days”, Lenta).

The consumer demand is the major factor to determine whether retail chains switch to foreign suppliers or not. At present the continued trend towards lower global food prices persists, in addition there are significant risks that the share of imported items might increase in the domestic market if the counter-sanctions are lifted.

Would the system of bonuses remain in place for retail chains that continue to support domestic suppliers?

Elena Kovaleva: Various measures aimed at encouraging retail chains to support domestic suppliers are distorting the market. We want domestic suppliers to be able to compete against foreign suppliers. State support must be aimed at ensuring quality and safety of products, at standardizing and branding them.

In addition, the marketing strategy of many retail chains emphasizes the development of house brands in the lower price segment. In 2015, their share expanded to 1.1% versus the 0.85% that we saw before.

Which goods do you think are going to become more expensive in the next few months? What is the reason?

Elena Kovaleva: The food prices are going to be affected by the seasonal factor. Traditionally, at the beginning of the year it is the prices for fruits and vegetables that are going up while the prices of sugar, for example, usually hit the lowest point.

Source: the website of Zvezda (“Star”)TV channel.