RUSSIAN CONSUMER PRICE DEVELOPMENTS IN JULY CONFIRM A POSITIVE TREND.

Having peaked in April and May at 25.0 percent, the year-on-year rate of consumer price inflation declined to 23.7 percent in June, while the just-released figure for July confirms the trend of modest, but steady further improvement. Consumer prices in July were up 22.2 percent year-on-year as the average level of consumer prices was only 0.5 percent higher than in June. A slackening of inflation in the summer months is often observed due to the impact of increased availability of agricultural produce on food prices. Goskomstat reports that removing fruits and vegetables from the consumer basket for the comparison results in a 1.0 percent increase month-on-month in July. Prices of nonfood items increased by only 0.5 percent. Prices of services, which have typically outpaced other categories, were up 2.9 percent for the month. In the course of 2001, growth in the service prices index has been boosted primarily by increases in rents, utilities and rail tariffs. We project that year-on-year consumer price inflation will continue to fall to 18.1 percent by December. Despite continued fiscal restraint and lower prices for food as the harvest months approach, more rapid progress will not be achievable because of required additional hikes in administered prices.

Encouraging inflation numbers are attributable not only to the favorable development of food prices, but also to slower growth in the money supply. Year-on-year real growth in the monetary base, which accelerated from 5 percent in 1999 to 32 percent in 2000, was down to 23 percent in May 2001. In January-May 2001, the M2 money aggregate grew by 7.8 percent, down from 18.0 percent in the first five months of 2000. In May, M2 was up 48.4 percent year-on-year, compared to 53.6 percent in April and 62.4 percent at the end of last year. There seems to have been a subtle shift in Central Bank policy toward slower accumulation of foreign exchange reserves in an attempt to limit money supply growth. In the first half of 2001, the increase in official reserves was US$7.1 billion, which is US$2.2 billion less than the US$9.3 billion increase recorded in the first half of 2000. At the same time, foreign assets of Russian commercial banks rose by US$4.2 billion in the first half of this year, compared to US$2.2 billion in the same period of 2000. By allowing a larger amount of dollars to flow into the banking system, the CBR appears to be succeeding in reducing the impact of strong foreign exchange inflows on growth in domestic money supply (Goskomstat, July 2001; see also the Monitor, August 3).

RUSSIAN TRADE SURPLUS NARROWING.