Deflation comes from chemistry and metallurgy

The Rosstat summary of producer prices for industrial goods for October 2022 provides an opportunity to at least partially explain the increase in industrial production this autumn in the economy. For the first time since the beginning of the year, we can talk about industrial deflation, now it is quite mild and, perhaps, unstable. According to the statistics agency, by September, the producer price index in the Russian Federation fell by 2.5%, which also ensured a decrease in the index by 2% by the beginning of the year. In the year-on-year dimension, the increase in industrial prices remains in the positive zone (plus 0.8%), however, if the trend persists (see chart), a short-term decline in nominal prices in industry in this dimension is inevitable.

In most cases, in Russia, the main driver of changes in the industrial price index is production, which in many cases works directly or indirectly for export – and in it annual deflation is already noticeable (minus 6.3% yoy) and, apparently, will increase in early 2023 of the year. But in the index of industrial prices in October, a rather strong (minus 1.9% to September prices) deflation is found in processing. Here, the chances for a frontal and sustainable decline in the industrial price sub-index are less than for the index as a whole, although prices in processing have grown by only 2.5% since the beginning of the year, and by 0.6% by the beginning of the year. This dynamics fundamentally diverges from the dynamics of consumer inflation, although at the beginning of 2022 they behaved similarly.

Rosstat describes, first of all, a significant decline in the prices of intermediate goods, mainly products of chemical organic synthesis – in this sector, in contrast to metallurgy, the deflation of 2022 came later, in engineering (largely supported by military orders and government procurement), price increases at a level many times higher than consumer inflation continued in October, the decline in prices is noted in related industries – coke chemistry, processing at refineries, mining of ores and coal. In October, the growth of prices for utilities of all kinds, prices for which have been growing more slowly than inflation for many months, was also slowed down.

In practice, the impossibility of rising prices in industry can, in the current configuration, support the current growth in industrial production. But at the beginning of 2023, what is happening seems to indicate the risk of stagnation in the industry in general and in processing in particular.

Dmitry Butrin