High inflation of small growth - Newspaper Kommersant No. 47 (7492) of 03/21/2023

High inflation of small growth - Newspaper Kommersant No. 47 (7492) of 03/21/2023



After a “week of silence” that preceded the meeting of the Board of Directors of the Central Bank on the key rate, a number of bulletins of the Bank of Russia were published, largely revealing the logic of the decision on March 17 to maintain it - they mainly concern February inflation and price expectations. Based on these data, the main problem of the Central Bank, in addition to the instability of foreign markets, is now the inability to accurately assess both the length of the period of moderate inflation, which the Russian economy apparently entered in February 2023, and the duration and intensity of the subsequent period of increased inflationary pressure. Both effects can overlap, but by changing the key rate, the Bank of Russia can correct inflation dynamics only with a long lag, not always knowing exactly which of the components of the mechanism will work at the moment of prevalence.

The Bulletin of the Bank of Russia "Monitoring of Enterprises" according to a survey of companies on March 1-14 shows a high realism of a relatively long-term (one or two quarters) growth in supply in the Russian market above actual demand: indicators of the business climate, estimates of the current volume of production, demand are very good (this Q2 2021 levels), overall business climate indicators are now, in fact, better than in most periods of 2016-2020.

However, "price expectations of the business increased after falling in the previous two months," the Bank of Russia states. Demand is still relatively low in trade, but, as in construction, positive changes are strong here in February. Credit conditions for companies are assessed as easing, and "the slowdown in the growth of enterprises' costs continued in March."

At the same time, with the obvious readiness of the industry for output growth that outpaces current demand (especially in the case of investment goods), the Bank of Russia is most worried about the possibility of a sharp change in consumer sentiment and a sharp increase in demand, which itself will outstrip the possibilities of the industry - this is a repetition of the "post-COVID" scenario summer-autumn 2021. Apparently, the Central Bank considers the already existing disinflationary processes not as powerful as pro-inflationary factors, therefore, the period of inflation being below the Bank of Russia's target of 4% is expected to be very short - a few months after April 2023 - after which the price index will return to a higher level. 5% in the second half. A quick recovery in consumer demand in this situation will further exacerbate the problems of the regulator.

The February Bulletin "Consumer Inflation" demonstrates a quite steady decline in current inflation at the end of winter - however, volatile components accounted for a third of it, including a slowdown in the previously strong rise in prices for services. It is hardly possible to say for sure how long the “catching-up” growth in prices for services will last, but in the most problematic scenario, it will aggravate at least the next stage in the evolution of inflation in 2023 — the transition in the second half of the year to the trend “inflation slightly above the Central Bank’s target”, and changing consumer sentiment and a sharp increase in demand is clearly able to turn the situation into a problem - by the fourth quarter of 2023. But in order to reliably prevent such a scenario, the Central Bank, with confidence in its implementation, should already raise the key rate in the second or third quarters - even at a time of low inflation. At the same time, so far the data of the Bank of Russia — for example, on the decline in February and trend inflation, on the slowdown in price growth in February in 75 regions of the Russian Federation out of 82, on the decrease in regional inflation heterogeneity (the lowest in the Southern Federal District) — show that to deal with possible "overheating" of the Central Bank will have to (if necessary) in a situation of low, albeit growing inflation. Considering that it is also impossible to cancel the effect of additional factors, for example, the “pass-through effect” from the January depreciation of the ruble, which is currently weak, it is clear that the Bank of Russia will act only with very strong reasons: even the “growing” uncertainty will force the Central Bank to save situation "as is" than to move the bet.

Dmitry Butrin



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