Elevated Inflation Remains Sticky in Russia Amid Ruble Woes
Bottom Line: According to Russian Federal Statistics Service (Rosstat) data released on December 11, inflation ticked up to 8.9% YoY in November after hitting 8.5% in October, remaining well above the Central Bank of Russia’s (CBR) midterm target of 4%, due to surges in services and food prices, weakening Ruble (RUB), elevated inflation expectations and huge military spending. Given CBR’s hawkish forward guidance, we think CBR will likely hike the key rate to 23% on December 20 to curb inflation.
Figure 1: CPI, Core Inflation (YoY, % Change) and Policy Rate (%), January 2015 – November 2024
Source: Continuum Economics
According to Rosstat figures, the inflation rate continued to stay elevated at 8.9% YoY in November. MoM price growth fastened to 1.4% in November from 0.8% in October driven by the services and food prices. Higher prices were recorded for services (+11.4% MoM vs. +11.3% MoM in October) and food (+9.9% MoM vs. +9% MoM in October). Meanwhile, the surge in non-food product prices remained steady at 5.7% when compared with October.
In addition to high military spending and elevated inflation expectations, we believe the weakness of the currency continues to adversely impact inflation outlook. RUB lost about 15% against the USD due to panic buying of foreign currency in the wake of new U.S. sanctions on Russian banks including Gazprombank late November. Despite CBR halted foreign currency purchases in response to the RUB fall, the RUB continues to stay well above 100 threshold, hovering around 104 as of December 12.
Despite aggressive tightening continues with pace in Russia given inflationary risks and CBR’s hawkish forward guidance, 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.
Despite CBR’s inflation target for 2025 remains at 5%-5.5%, we think it will be very tough to reach these targets under current circumstances. (Note: We now predict annual average inflation to stand at 7.4% and 5.1% in 2025 and 2026, respectively). As restrictive monetary policy partly suppresses prices with lagged impacts, we feel cooling off inflation will take longer than CBR anticipates since inflation expectations of households and businesses continue to edge up. In this high-inflation environment, we foresee CBR will hike the rate in Q4 to 23% on December 20 due to increase in cost of borrowing, hike in inflation, new set of sanctions, and surge in public spending.
It appears that above mentioned economic strains are not going to ease any time soon and the CBR will likely have hard times particularly in H1 2025 until inflation starts softening, RUB stabilizes and inflation expectations converges to CBR’s forecasts.
Of course, the key will be how Ukraine war will go in 2025. We think a ceasefire in Ukraine in 2025 is likely under new Trump administration which could lower military spending, relieve the pressure on RUB and help inflation to cool off in the medium term.