The Bank of Russia expects an increase in inflationary pressure in the economy

The Bank of Russia is already confidently expecting an increase in inflationary pressure in the economy in the summer of 2023. The May data confirmed the main assumption of the Central Bank: the scenario of 2021 is repeating – domestic demand, credit and budgetary impulse create pressure on the markets, which, with all the desire, will not be able to quickly compensate for the growth of domestic output. According to economists of the Central Bank, the budget can suspend the future surge in prices in 2023.

The May Bulletin of the Bank of Russia “What Trends Say” describes a more or less complete picture, which has been created in fragments in separate speeches by representatives of the Central Bank since the end of 2022. The peak of the inflationary downturn on the “base effect” was apparently passed directly in May (the April low was 2.3%, as of May 22, inflation was estimated “close to” 2.3%), at the time the Central Bank document was created, inflation was estimated at 4% , and in the second half of 2023 it is expected to be higher than the target of the Bank of Russia. How long it will be at elevated levels is not described in this bulletin of the Central Bank, however, the regulator’s forecast assumes stabilization of price pressure at the end of 2023 without a strong change in the key rate.

The logic of the Bank of Russia experts has not changed much: the scenario expected for the coming months is the same as in the fall of 2021, when a very rapid recovery of pent-up domestic demand outstripped supply opportunities, both production and logistics. The Central Bank separately examines the mechanics of what is happening on the example of the car market: according to the Bank of Russia, supply is now lagging behind, which in the future will cause an aging car fleet in the Russian Federation and a longer demand for new cars in the long term. The Central Bank also notes a 35 percent increase in the volume of imports of used cars in the Russian Federation. Thus, the “autocomponent” in inflation will work longer than previously expected.

This apparently applies (adjusted for specific products) to the entire group of non-food products. In the ultra-low inflation of April 2023, food prices did not change on average (0%), non-food products became cheaper by 0.3% year-on-year, services rose by 9.4% 12.6%. The Central Bank expects prices for non-food products to rise as inventories decrease, “which were made with a stronger ruble.”

In turn, the savings rate is declining, while household credit continues to grow. The new thesis of the Bank of Russia – the restoration of relative prices for services demonstrates the absence of significant and systemic shifts in the balance between services and goods in consumption. In addition, the Central Bank notes that since the end of 2022, goods supplied through parallel imports have become more expensive, while alternative imports (analogue goods and new brands from new countries that were not previously present on the Russian market) have become cheaper. It should be noted that, for now, the Bank of Russia apparently does not expect higher volumes of consumer and intermediate imports from Asian countries, which, in theory, can replace in the Russian Federation not only goods from the G7 countries leaving with sanctions, but also displace Russian ones. Finally, the shortage of labor in the Russian Federation makes the growth of real wages inevitable.

Another new thesis of the Central Bank is that, presumably, the pressure on the most volatile components of inflation observed since the end of 2022 is a harbinger of future price growth. In any case, such dependence was observed by the Bank of Russia on the data of the last 20 years. This mechanism has not been fully explained, probably, “noisy” volatile prices react faster to fundamental changes in the balance of supply and demand, and the complex dynamics of inflationary expectations may also play a role.

According to the Central Bank, the acceleration of inflation may somewhat moderate the budget policy. If the government considers that the economy does not need additional fiscal stimulus, spending parameters in the second half of 2023 will remain conservative, and the budget deficit will remain planned. The fear of additional stimulation of GDP growth is gradually becoming a commonplace in the rhetoric of the Central Bank: it is likely that such proposals are constantly discussed non-publicly in the Russian authorities.

Dmitry Butrin