Russia’s Inflation Surged Fast in September
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Bottom Line: As we expected, Russian inflation continued its increasing pattern in September by hitting 6.0% Yr/Yr. According to the figures announced by Rosstat on October 11, the prices rose by 0.9% on a MoM basis, which marks the fastest MoM pace since April 2022, particularly due to a steep weakening Rouble (RUB), high consumer demand and lending, tight labour market, elevated inflation expectations, and strong government spending. We foresee that the annual average inflation to stand at 5.5% in 2023.
Figure 1: CPI Inflation Rate (%, YoY), September 2022- September 2023
Source: Datastream, Continuum Economics
According to Rosstat, prices of food, non-food products and services rose by 0.86%, 1.09% and 0.61% on a monthly basis in September, respectively. The consumer price index (CPI) also hiked by 0.87% on a monthly basis after a 0.28% increase in August, marking the fastest monthly increase in the last 17 months.
We think the inflationary pressure stayed strong in September particularly due to a weakening RUB, high consumer demand and lending, and tight labour market. Despite Central Bank of Russia (CBR) hiking the key rate by 450 bps to 13% after August, it appears this strong hawkish move could not reverse the weakness of the currency. RUB plunged to an 18-month low against USD on October 9, exceeding 102.1 level, the lowest since March 2022, led by the ongoing war in Ukraine besides the recent escalating tension between Israel and Hamas. (Note: The RUB has weakened by 40% since the beginning of 2023 owing to stronger dollar and high demand for imports coupled with reduced exports). As RUB continues to remain weak, this strongly ignites inflationary pressures, and we think this will continue to be the case in 2024.
In addition, CBR announced on October 10 that Russia’s foreign trade surplus shrank more than 2.8-fold in January-September 2023 YoY to $87.8 billion while the surplus of the country’s payment account balance also plummeted almost 4.8-fold in the same period to $40.9 billion, clearly showing the deterioration on the trade front and further pressure over the currency.
Speaking on accelerating inflation, Deputy Central Bank Governor Alexei Zabotkin told the media on October 10 that CBR’s inflation forecast for the end of this year stands at 6-7%, and the CBR admits additional tightening of its monetary policy is required for returning inflation to 4%. Strongly signalling the tightening cycle to continue, Zabotkin noted that "We believe that for returning inflation to the 4% target in 2024, it will be necessary to maintain stringent monetary policy during the next year. And we do not rule out that additional toughness will also be required, apart from decisions that have already been taken." In a similar vein, Governor of the Bank Elvira Nabiullina said on September 29 that "Further decisions on the key rate will be made based on the evolution of the situation - as inflation stabilizes at the 4% target level, the rate can be reduced. (…) There is a great deal of uncertainty at the moment. We will examine the impact of previous policies on inflation, and our policy will become more specific."
Despite September inflation is still inside the range of CBR's forecast of 5.0-6.5% range, it is still well above CBR’s 4% target, and close to upper limit of the CBR’s forecast. As we highlighted in the September outlook, we foresee that CBR is likely to hike the rate by 50 bps to 13.5% on the next MPC meeting scheduled on October 27, particularly if the USD/RUB rate stays above 100.
Despite CBR’s determination, cooling off inflation will not be straightforward as the country continues to be squeezed by the sanctions and the war. It is obvious that the biggest concern of CBR remains the steep upward trend in inflation, particularly propped up by both buoyant public sector and consumer demand. Increasing consumer spending seems supported by the expansion of lending and increased real wages. Taking into account that the government spending remains high due to war-related military expenses, and the presidential elections are fast approaching in March 2024, these bring forth the risk of upward inflation pressures staying longer than Russian officials are hoping for.