The Russians predicted an increase in inflation due to the weak ruble

Transfer effect

In general, official figures, especially for such short time periods, should not be misleading. They have their own life, the store price tags have their own. The day before, the Central Bank said in its review that in July, due to the weakening of the ruble, categories dependent on imports rose noticeably in price: appliances and electronics, cars, foreign tourism, fruits, meat products and gasoline. According to experts, what is happening is a classic pass-through effect caused by the collapse of the ruble exchange rate. The situation is aggravated by the credit boom in the economy, which, together with the devaluation, creates a truly infernal mixture. According to the Central Bank, in June alone, banks increased the issuance of retail loans by 17.3%, mortgage loans by 23%, car loans by 13% yoy.

In July, fruit and vegetable prices rose unusually sharply for this month – by 12.9% compared to the same period last year. However, deflation was observed then: in July 2022 alone, the price tags for fruits and vegetables fell by 11.5% at once. Today the picture is different. In particular, oranges rose in price by 22.6% (against June), white cabbage – by 12.5%, apples – by 9.5%, lemons – by 7.9%, granulated sugar – by 4.4%, chicken meat – by 2.2%. In general, inflation for food products in July amounted to 2.23% in annual terms and 0.49% in monthly terms.

The main contribution to the overall inflation was made by the rise in prices for non-food products — by 2.36% yoy and by 0.91% compared to June. TVs added 4.9% in price (against the previous month), metal tiles – 4.8%, cement – 3.3%, motor gasoline – 2.2%, cars – 1.5%. As for services, they have risen in price by 9.95% in annual terms and 0.48% in monthly terms. In particular, holidays in the UAE – by 10% (by June), trips to Belarus – by 5.9%, hostel accommodation – by 4%, taxi travel – by 3.8%. “An unpleasant feature of recent weeks has been a fairly wide range of price increases for medicines and related types of hygiene products,” economists of the CMASF note.

A separate topic is the representativeness of figures from government sources, although I don’t want to go into it at all. First, it’s easy to get bogged down in a pile of these statistics. Secondly, there is a suspicion that they often do not quite adequately reflect certain economic phenomena and trends, since they are based on an ambiguous, let’s say, methodology. For example, Rosstat’s basket for calculating inflation includes about 700 items, including obviously non-essential items, such as plastic flowers. In addition, the agency does not take into account prices in rural areas, the rental market and does not take into account discounts. The independent research holding Romir operates with a much narrower range of “consumer goods”, its FMCG (short for Fast Moving Consumer Goods) deflator index is even more trustworthy even purely intuitively. Analysts compare checks of more than 40,000 Russians in 220 cities across the country. According to their calculations, since the middle of last summer, prices for everyday goods have increased by 17%, and from June 2021 to June 2023 – from 117% to 192%.

Edge of Stabilization

In itself, the concept of “inflation” is infinitely multifaceted and refers rather to the subjective and personal feelings of each individual person, to the most important components of everyday life. In fact, this is nothing more than an indirect withdrawal of a part of material wealth from our pockets. We feel inflation not so much through rising prices, but through a drop in the purchasing power of our incomes. And our personal experience of shopping is weakly correlated with data regularly published by government departments. Actually, this is why 17% of Romir is closer and more understandable to the average person: the figure does not need to be deciphered, unlike 4.4% from Rosstat. By the way, against the backdrop of a sharp depreciation of the ruble, the forecast for the final annual inflation worsened the Central Bank: previously, the financial regulator called the range of 4.5-6.5%, now – 5-6.5%. It looks modest, but also a touch in the overall picture. According to Deputy Chairman of the Central Bank Alexei Zabotkin, the weekly inflation rate is still above the seasonal norm for early August: during this period (on average for previous years), the general price index either did not change, or was even slightly negative.

“Trends in the economy sometimes mean much more than absolute values,” says Igor Nikolaev, chief researcher at the Institute of Economics of the Russian Academy of Sciences. — The saddest thing is that today inflation is clearly accelerating, while last year it was declining, starting from March, when it exceeded 17%. And it is absolutely incomprehensible where is the line on which it can stabilize. Given what is happening with the exchange rate, this is unlikely to happen soon. In conditions when we already have about a hundred dollars, the general uncertainty in the economy increases, and sellers and manufacturers insure against it very simply – they raise prices. Who will stop them from doing otherwise? Competitors who don’t exist? That is, the problem lies not so much in the direct, but in the indirect impact of the weak ruble on inflation, in the form of increased uncertainty.”

In March last year, when the Russian currency collapsed to a historic high of 121 rubles per dollar, the price tags in stores reacted almost instantly – with explosive growth. And then, when the ruble strengthened to the level of 55-60, a rollback occurred, but not in all segments of the retail trade. Let’s say that building materials remained one and a half to two times more expensive compared to the price situation until February 2022. Accordingly, argues financial analyst Sergei Drozdov, today the sellers have a certain material reserve, which allows them to maintain current prices for some time. They are well aware that otherwise demand will suffer, margins will fall. But it is also obvious that in autumn the stocks in the warehouses will run out and it will be necessary to plan new purchases. This affects not only the category of non-food products entering Russia through parallel imports – computers, smartphones, household appliances.

“For example, meat processors are critically dependent on foreign supplies not only of meat, but also of a mass of ingredients to improve the taste, smell, and safety of products,” Drozdov notes. – And now, with the extreme volatility of the exchange rate, everyone is sitting and thinking: what about new purchases, maybe it’s better to refrain from them altogether in the foreseeable future? Suppose today we order goods at a rate of 100 per dollar, and tomorrow it will be unknown what, up to a rollback to 85. As a result, meat products not only become more expensive, but also significantly lose quality: the share of the same beef in them tends to zero. Today, the trend observed in the grocery segment for the past ten years is clearly intensifying: price tags are growing, while quality and nutritional value are falling. The presence of palm oil in the formulation has grown exponentially since 2018.”

As for regulatory measures to influence inflation, the interlocutor of “MK” does not believe in their potential effectiveness. According to Drozdov, raising the key rate with such a weak ruble and an ultra-high share of imports in foreign trade is “savagery and nonsense, if you call a spade a spade.” The measure will not give any other result, except for the suffocation of an already battered economy. After all, today inflation in Russia is fueled by fundamental macroeconomic factors. In particular, the costs incurred by manufacturers due to the loss of sales markets and access to Western components and technologies, the disruption of logistics chains, the difficulties of building them in the East, the rise in freight, insurance, and so on.

Area of ​​responsibility of the state

“Undoubtedly, the balance of risks is shifted towards pro-inflationary circumstances – much more long-term and “systemically packaged” compared to disinflationary ones,” says Nikita Maslennikov, a leading expert at the Center for Political Technologies. – According to the Central Bank, in July, after two months of stabilization, the price expectations of enterprises moved up, not only industrial, but also all the rest. Companies (14.5 thousand, according to the regulator’s sample) point to high cost pressure caused by higher prices for imported components due to the depreciation of the ruble. This is a visible harbinger of an increase in selling prices, which, with a lag of five to six weeks, will inevitably be transferred to retail prices, which we will see on the shelves.

The basic problem is that demand steadily exceeds supply, and this is not the responsibility of the Central Bank, but of the state as a whole: we are talking about the current business conditions, frankly unfavorable against the backdrop of geopolitical uncertainty. Among other things, reminds Maslennikov, the structure of production costs is associated with tariffs for electricity, gas supply, sewerage established by regions and industries, with the state of production lines (which are 80% of non-Russian origin), feed base for livestock and poultry farming, and many other points. For example, a powerful pro-inflationary factor is the long-standing systemic practice of cross-subsidizing, when the authorities reduce tariffs for the population by raising tariffs in the corporate sector.

“In general, there is no one and only inflation: there are at least two of its types – demand-pull inflation and cost-push inflation,” says the interlocutor of MK. – Plus, the price dynamics varies greatly by product groups. As for the current picture, it is largely blurred by the seasonal decline in prices for agricultural products of the new crop. We must wait until the end of September – the beginning of October, when this deflationary “noise” will go away. These months and a half became the key to annual inflation in previous years as well. So far, the scenario with 6% (the upper limit of the Central Bank’s forecast) remains the most likely, but anything can happen in reality. Much depends on how long the period of ruble exchange rate volatility lasts.”

There is hope that the rate will be able to stabilize in the 90-95 corridor, as foreign trade indicators improve. In six months of 2023, the current account surplus decreased by 7.2 times, and in seven months by 6.6 times. Plus, discounts for Russian oil Urals are reduced in relation to the benchmark Brent. On the other hand, Maslennikov notes, 42% of export payments are made in rubles, which leads to a significant shortage of foreign exchange liquidity in the market. It is no coincidence that the Central Bank refused to purchase foreign currency (yuan) within the framework of the budget rule and now until the end of the year it will only sell it, while continuing to raise the rate.

Meanwhile, the current situation is inseparable from the general context of events and circumstances from the relatively recent past. For example, at the end of 2013, the dollar cost 32.6 rubles. And the accumulated inflation from December 2007 to July 2023 was 210% (following the exchange rate). At the same time, there has been no steady growth in income in the country for ten years, while Russians have received loans worth 33 trillion rubles. And the trouble is that all statistics, all conversations, all conclusions change absolutely nothing in the life of a small person with a monthly salary of 30-40 thousand rubles, two or three always hungry children and a loan burden of hundreds of thousands. Why does he need information from the media that from September 1 suppliers will sell tea and coffee to retail chains at 6-9% more expensive? Or that confectionery will rise in price for stores by 15% in September? For a small person, everything has been clear for a long time: it will only get worse. His personal picture of the world, based on bitter experience, including in terms of inflation, will invariably be at odds with any reality.

Schedule.

Dynamics of inflation in annual terms (%)

2022

March 16.7

April 17.8

May 17.1

June 16.2

July 15.1

August 14.3

September 13.6

October 12.6

November 11.9

December 11.9

2023

January 11.7

February 10.9

March 3.5

April 2.3

May 2.5

June 3.2

July 4.3

August 4.4

Source: Rosstat