The inflationary challenge: what will happen to rising prices and interest rates
Inflation in Russia has accelerated again. After several months of steady, albeit slow, dampening of price growth, Rosstat again recorded a noticeable acceleration. For the period from June 16 to June 22, the growth was 0.25% (against 0.15% a week earlier). In annual terms, inflation rose to 5.9% compared with 5.6% in the previous week. Izvestia investigated whether this jump means the formation of a new stable trend or is it a temporary fluctuation, what is the role of fuel costs in this and whether the Bank of Russia will have to put the monetary policy easing cycle on a long pause.
Industry surge
A closer look at the Rosstat data shows that the current acceleration of inflation has a pronounced sectoral character — mainly "vegetable" and "fuel". Cabbage, in particular, immediately rose in price by 4%, and potatoes — by 7%. An equally important driver of the price tag increase was the situation on the fuel and lubricants market.
The main reason for the acceleration is a combination of several factors, where the rising cost of gasoline and diesel plays a dominant role, says Pavel Biryukov, chief economist at Gazprombank. During the reporting week, the increase in prices for motor fuel amounted to 2.9% (after an increase of 0.9% in the previous period).
This surge has more than offset the positive trends in other segments of the consumer basket. The rise in prices of vegetables — except cabbage and potatoes — began to slow down (plus 1.5% versus 1.6% previously), and the rise in air ticket prices, traditionally a volatile component in the summer season, stopped altogether.
Fluctuation or a new trend
However, it's obviously too early to panic. Core inflation, cleared of one-time shocks, remains under control.
According to Biryukov's calculations, adjusted for volatile factors (certain types of food and tickets), core inflation remains at normal levels — about 3.7–4.2% in annualized terms with seasonality removed. There is an important leading indicator: despite the growth in retail recorded by Rosstat, wholesale fuel prices on the stock market have already moved to correction in the reporting week, having decreased by 1.6% after the previous rise in price by 4.3%.
"The correction of wholesale fuel prices that has already begun, as well as the measures taken by the authorities to stabilize supplies, are likely to limit price pressure in the coming weeks," the economist predicts.
Evgeny Goryunov, head of the Monetary Policy Laboratory at the Gaidar Institute, is skeptical about the significance of the weekly jump. He emphasizes that weekly data is not very reliable for forming deep macroeconomic conclusions.
— Judging by the monthly data for the last three months, the rate of price growth is gradually decreasing. Fuel is getting more expensive quite intensively, but in recent months the overall rate of price growth has slowed down," the expert explains.
Thus, the June surge is classified more as a local fluctuation caused by a supply shock in a particular commodity market, rather than as an overheating of consumer demand.
The bet is on pause
Despite the fact that the gasoline crisis is temporary, it has a direct impact on the decision-making logic of the Bank of Russia. The regulator evaluates not so much the fact of the increase in the price of a liter of gasoline, as the secondary effects of this event.
The topic of the fuel market has already been mentioned in the release following the meeting of the Central Bank on June 19, recalls Olga Belenkaya, head of the Macroeconomic Analysis Department at Finam. The regulator explicitly pointed to the growth of pro-inflationary risks due to a temporary decrease in motor fuel production.
— According to the Chairman of the Bank of Russia, Elvira Nabiullina, it is very important here how the situation will develop and to what extent these factors can transform from one-time factors into sustained price pressure, primarily through an increase in inflation expectations. The Central Bank plans to include this factor in the July survey," says the interlocutor of Izvestia.
Inflation expectations of the population and businesses are a key marker for the Central Bank. When people see gasoline rising in price, they begin to factor rising transportation costs into the prices of their goods and services, which spins a general inflationary spiral. Until the regulator is satisfied that fuel problems have not led to a deterioration in these expectations, a further reduction in the key rate is unlikely.
Evgeny Goryunov adds another significant aspect to this. In his opinion, the Central Bank's caution is not so much related to gasoline as to the fiscal policy of the state.
"The fact that the Central Bank has shortened the rate cut, as it seems to me, is not related to the current inflationary processes, but is a proactive measure to contain a new inflationary wave that will arise if budget indicators fail to normalize," says a representative of the Gaidar Institute.
Forecast for the second half of the year
In the current situation, market participants should prepare for the fact that the monetary policy easing cycle will be put on pause at least until the end of summer. The next Central Bank reference meeting will be held on July 24, and by that time the regulator needs to receive complete data on inflation expectations and lending dynamics.
Taking into account the new circumstances, the baseline scenario, as Olga Belenkaya notes, assumes a wide range of the key rate at the end of this year at the level of 13-14%.
— The most likely range is 13.25–13.75%. Lower key rate values are possible in the event of disinflationary factors, which the Bank of Russia attributes to a more significant slowdown in domestic demand," the expert summarizes.
The equity and debt markets have already begun to adapt to the prospect of maintaining tight monetary conditions (the real rate, the key rate minus inflation, remains the highest in the world). The June statistics from Rosstat showed that the path to inflation targets remains difficult and not without bumps. Any disruption in production chains can quickly bring inflationary pressure back. The Bank of Russia prefers to be reinsured by keeping the value of money at levels that guarantee a cooling of lending activity. And the price of this will be a slowdown in economic growth.
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