Inflation gains momentum

Russia’s Central Bank expects prices to rise. But just a month ago, Putin was hailing the country’s low inflation rates compared to the rest of the world.

At the start of the summer, Putin boasted of how inflation in Russia was approaching record lows and was even less than in many Western countries at 2.9%. However, with the rapid fall in the ruble and high levels of consumer demand, the Central Bank is warning of price rises to come.

According to the Central Bank’s latest figures, price rises over the past 12 months reached 6.4%. Since the start of this year alone, they are up 3.25%. The bank’s analysts anticipate that the coming months will see annual inflation rates getting higher. Taking into account current monetary policies, the rate will be 4.5-6.5% this year.

The weakening ruble's knock-on effects are currently less noticeable than usual, the Bank warned. There are exceptions for specific goods and services where demand remains high (cars, foreign tourism). As demand grows and existing stocks deplete, the combined impact of ruble depreciation may have a greater impact on prices, the Bank’s analysts warned.

Inflation was also boosted by labor shortages, wage increases outstripping productivity and consumers choosing to spend rather than save, which encourages manufactures to hike prices.

The Central Bank published fresh data on inflation a week before its next meeting to discuss the base interest rate, which has held steady at 7.5% since September 2022. Now, Russian analysts predict a 50bp increase.

Why the world should care

Official inflation rates in Russia have been low all year, close to the Central Bank’s 4% target. However, factors such as ruble depreciation, increased demand, depleted stocks of imported goods indicate that inflation is set to increase. This will compel Russia’s Central Bank to pursue a stricter monetary policy.