Stubborn Inflation Continues to Stay Elevated in the First Month of 2025
Bottom Line: According to Russian Federal Statistics Service (Rosstat) data, inflation ticked up to 9.9% YoY in January after hitting 9.5% in December, remaining well above the Central Bank of Russia’s (CBR) midterm target of 4%, due to surges in services and food prices, huge military spending, labor force crisis and elevated inflation expectations. We think that risks to the inflation outlook will remain upside until the war Ukraine comes to an end and CBR could consider reducing the rates afterwards, but this will depend on how peace negotiations will proceed in spring 2025.
Figure 1: CPI, Core Inflation (YoY, % Change) and Policy Rate (%), January 2015 – February 2025
According to Rosstat figures, the inflation rate continued to stay elevated at 9.9% YoY in January, the highest since February 2023. MoM price growth fastened to 1.2% in January driven by the services and food prices. Food prices surged by 1.3% MoM and 11.1% annually in January. The cost of services soared by 2.1% against last December and by 12.9% in annual terms. In addition to high military spending and elevated inflation expectations, we believe the weakness of the RUB continues to adversely impact inflation outlook.
Despite lagged impacts of monetary tightening, it appears the economy remains overheated as the growth in domestic demand is still significantly outstripping the capabilities coupled with strong fiscal support to military staff and their families.
Speaking about the course of inflation, CBR governor Elvira Nabiullina stated on February 14 that unacceptably high annual inflation is worrisome. Nabiullina added the inflation is expected to reach its peak in April - May 2025 and the regulator sees as the price growth rate gears down amid the RUB appreciation.
Additionally, CBR said in its statement last week that current inflationary pressures remain high, warning that medium-term inflation risks are still tilted to the upside. The regulator hiked its 2025 inflation forecast to between 7% and 8%, from 4.5% to 5%, and highlighted that the inflation will hit target of 4% in 2026 staying there further on. (Note: CBR emphasized that it will assess the need for a key rate increase at its upcoming meeting taking into consideration the speed and sustainability of the inflation slowdown).
Despite the Ministry of Economic Development expects the inflation will reach 4% in 2026-2027, and CBR now envisages the inflation will hit 4% in 2026, we feel achieving this will be very tough since cooling off inflation will take longer than CBR anticipates taking into account that demand stays elevated and inflation expectations of households and businesses continue to edge up as it appears economic strains are not going to ease any time soon.
We foresee a probable Russia-friendly peace deal in Ukraine following immediate talks between the U.S. and Russia could ease some pressure on inflation, alleviate demand-supply imbalances within Russia's economy, and be a relief for war-torn economy. We think that risks to the inflation outlook will remain upside until the war Ukraine comes to an end and CBR could consider reducing the rates afterwards, but this will depend on how peace negotiations will proceed in spring 2025.