A war launched by the Kremlin against Ukraine took the blame for driving up the global cost of everything from food to fuel, prompting international sanctions that also contributed to one of the biggest price shocks in modern Russian history.
(Bloomberg) — A war launched by the Kremlin against Ukraine took the blame for driving up the global cost of everything from food to fuel, prompting international sanctions that also contributed to one of the biggest price shocks in modern Russian history.
But a year on, and even as inflation continues to rage in many major economies, price growth in Russia has plunged near the level in Japan and well below those seen in the US and the Eurozone.
On an annual basis, Russian inflation reached 3.5% in March from almost 11% in the previous month, according to data released on Wednesday. It’s now at a fifth of its peak last year and under the central bank’s 4% target for the first time since 2020.
The stark contrast with much of the rest of the world has allowed Putin to score easy political points with his domestic audience, highlighting Russia’s resilience and claiming sanctions against his country backfired on those who imposed them. In televised remarks on Tuesday, Putin said inflation may even be below 3% this month.
The Russian leader has previously chided western governments for labeling surging costs as “Putin’s inflation,” saying their own policies such as money printing were at fault.
The turnaround in Russia is in large part a result of statistical effects because a brief crash in the ruble and panic buying by consumers a year ago created a high base of comparison. Still, muted domestic demand and lingering caution by consumers are keeping shorter-term gauges of price growth in check.
What Bloomberg Economics Says…
“The drop in annual inflation is largely optical and goes back to the high base effect, created by last year’s ruble decline at the start of the Russia’s invasion of Ukraine. But we expect a weak ruble, labor shortages and a likely shortfall in grain harvest to push inflation higher in coming months.”
—Alexander Isakov, Russia economist. For more, click here
“Low inflation is the best measure of what’s going on in the economy — demand has remained subdued and consumers are careful,” said Dmitry Polevoy, economist at Locko Bank.
Looking ahead, however, risks abound.
Budget, Labor
The enormous surge of budget expenditure and labor shortages as a result of the Kremlin’s call-up of men to fight in Ukraine are putting pressure on prices, especially as recent declines in the ruble add to strain on consumer costs.
The upshot for policymakers is that threats to the outlook will keep them on alert for longer, with the central bank already holding its benchmark at 7.5% for four straight meetings and warning a hike is possible in the months ahead. It next reviews interest rates on April 28.
Data for March already indicated risks are on the rise. The annual rate was slightly above the 3.4% median forecast in a Bloomberg survey of economists, and price growth was little changed on a monthly basis.
Bloomberg Economics expects inflation to reach 5% in December. According to its seasonal adjustment, annualized price growth now stands at 1.1%.
Besides pro-inflationary risks such as a dearth of workers, other factors at play now include the possibility of a revival of consumer demand and threats to the transit of sanctioned goods into Russia, according to Olga Belenkaya, an economist at Finam.
But planned output cuts by OPEC and its allies could bolster the ruble and Russian exports, supporting disinflation, she said.
“To some extent, this can ease inflationary pressures,” Belenkaya said.
(Updates second chart)
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