Russia’s Inflation Stays Strong in October
Bottom Line: Russian inflation continued its increasing pattern in October by hitting 6.7% Yr/Yr. According to the figures announced by Rosstat on November 10, the prices rose by 0.8% on a MoM basis, which marks the second fastest MoM pace after September since April 2022, particularly due to high consumer demand and lending, tight labour market, elevated inflation expectations, and continued strong military spending.
Figure 1: $/RUB Rate, November 2021 - November 2023
Source: Datastream, Continuum Economics
According to Rosstat, prices of food, non-food products and services rose by 1.35%, 0.55% and 0.48% on a monthly basis in October, respectively. The consumer price index (CPI) also rose by 0.83% on a monthly basis after a 0.87% increase in September, making it the second fastest monthly increase in the last 18 months. We think the inflationary pressure stayed strong in October particularly due to high consumer demand and lending, demand and supply imbalance, continued military spending, lagged feedthrough of the weak RUB and tight labour market.
Central Bank of Russia (CBR) made it clear on its October 27 MPC report that as the growth in domestic demand continues to outpace the supply expansion capacity, demand and supply imbalance intensifies underlying inflationary pressures in the economy. Underscoring the steady growth in domestic demand, CBR mentioned that steep demand has been partly caused by expanding private demand, while public sector demand remained high and fiscal stimulus is now expected to increase again. High investment demand has been triggered by the increased profits of companies and positive business sentiment, supported by the fiscal stimulus (here).
Increased military spending for the war in Ukraine continues to ignite inflationary pressures. According to Financial Times on November 10, the country has added at least Rbs3.4tn ($37bn) to its budget for this year, igniting inflationary risks and widening cost in Ukraine. The finance ministry expects spending to reach Rbs32.5tn in 2024, an increase of almost 12% from the originally planned Rbs29.06tn, according to the latest official data.
On the currency front, as the CBR hiked the key rate by 650 bps to 15% after August, it appears this strong hawkish move partly reversed the weakness of the currency, particularly in November so far (Figure 1). After the RUB plunged to an 18-month low against USD on October 9, exceeding 102.1 level, the lowest since March 2022, it strengthened up to 91.6 as of November 9. We still think decreasing trade surplus coupled with huge military spending deepening Russia’s reliance on imports, would drive the inflation and may help weaken the RUB in the upcoming quarters. (Note: It seems government measures on the mandatory sale of foreign currency earnings by exporters have likely lowered the volatility of the RUB, as CBR recently said.)
Speaking on inflation, CBR governor Elvira Nabiullina said on November 9 that CBR will maintain stringent monetary policy for several quarters for returning inflation to the 4% target by the end of 2024 and signalled that the tightening cycle will continue. Addressing the State Duma, Nabiullina added that the peak of inflation pressure was passed in the third quarter while she underscored that annual inflation in Russia will start going down next spring and get to the targeted level by the end of next year. (Note: CBR expects inflation at 7-7.5% by the end of 2023, whereas inflation is projected at 4-4.5% in 2024 and close to 4% in the future. We foresee that the annual average inflation to stand at 5.5% in 2023).
In October, Putin expressed concern about the impact of a weak RUB on the country’s inflation rate. “It is obvious that one of the main problems at the moment is the acceleration of inflation,” he said. The president emphasized that the CBR and the government must “co-ordinate their efforts to reduce inflation” which “directly affects the wellbeing of Russian families”. Despite this, CBR governor Nabiullina partly challenged Putin by saying that that the constant growth in budget spending is one of the main obstacles to fighting inflation.
Despite CBR’s determination, cooling off inflation will not be straightforward as the country continues to be squeezed by sanctions and the Ukraine war. 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. The road to success will be long and painful.