Home Population bne IntelliNews – Russian population’s inflation expectations rose in August to 12% for the next 12 months

bne IntelliNews – Russian population’s inflation expectations rose in August to 12% for the next 12 months


The population’s inflation expectations rose in August to 12% on average from 10.8% a month earlier in the next 12 months against an actual rate of 15.1% recorded in July.

Inflation expectations peaked at 13.5% in February shortly after the start of the war in Ukraine and fell steadily as the Russian economy quickly stabilized, but rose last month at the end of the summer . (chart)

“In August 2022, although households’ inflation estimates declined, their one-year inflation expectations reached the upper end of the April-July range, as shown by the FOM survey,” the CBR said in a note. “The median estimate of inflation expected over the next 12 months reached 12.0%, the same level as in the summer of 2021. In contrast, short-term business price expectations continued to rise. downward trend, returning to mid-2020 levels. Analysts’ inflation forecasts for 2022-2024 have also fallen markedly. The Bank of Russia expects that given the continued monetary policy, annual inflation will decline slightly to 12-15% in 2022, 5-7% in 2023 and return to its target of 4% in 2024.”

Inflation expectations are an important indicator because if the public expects prices to rise, that in itself is inflationary. The Central Bank of Russia (CBR) works hard to manage public expectations and has strengthened its reputation for being able to manage these expectations, because the more confidence the central bank has, the easier it becomes to manage inflation.

Before the war and in the face of strong price growth caused by the pandemic, CBR Governor Elvira Nabiullina worried that inflation expectations would become “unanchored” and the central bank would lose the ability to control inflation as panic buying increases demand and begins to drive prices up on their own.

Nabiullina ended nearly seven years of rate cuts in May 2021 and began to aggressively raise interest rates again, then doubled rates to 20% shortly after the start of the war in Ukraine in late February. The sharp devaluation of the ruble should have pushed up inflation, but Nabiullina’s swift action and the tight currency controls she imposed in parallel nipped the surge in inflation in the bud and she was able to reduce rates four times since then to reach the current 8%. below pre-war levels. (chart)

Now some fear that Russia is facing the opposite problem. If prices are expected to fall in the future, consumers postpone purchasing decisions, the reduction in demand and therefore the expectation of lower prices becomes a self-fulfilling prophecy and the country may find itself trapped in a deflationary spiral that may take years to emerge from.

Currently, the median inflation expectation among the population over the next 12 months is a price increase of 12%, below the current actual inflation level of 15.1%, which itself has fallen by 17 .8% in April. (chart)

The CBR’s monthly FOM survey also revealed that the expectations of Russians with savings were still lower at 9.8% and that Russians without savings expect prices to increase by 14.3% over the course of next year, which is close to the actual rate of inflation.

“In August 2022, the median estimate of household inflation expectations for the next 12 months was 12.0% (+1.2 pp compared to July and -0.4 pp compared to June), as the FOM investigation shows,” the CBR said. “Inflation expectations rose slightly in August only in the subgroup of respondents with no savings, and specifically – among respondents with the lowest incomes. In recent months, estimates of expected inflation among respondents with no savings remain volatile, fluctuating widely from 11% to 14.5%, with no clear trend Inflation expectations among respondents with savings continued their downward trend for the fifth consecutive month, falling to 9.8% in August .

However, other economists point to the fact that Russia still suffers from mild deflation during the summer as harvest approaches, which lowers food prices as well as dacha garden production in hot weather. , contributing to downward pressure on prices. When the weather cools, prices usually rise again.

The CBR currently forecasts that inflation will end this year at 13.9% before falling to 5.1% in 2023. These forecasts are close to estimates by professional economists at Interfax and Reuters who expect inflation to will end this year at 13.6% and 13.4% respectively. All participants in the FOM survey – both panelists and professionals – have revised their estimates of year-end inflation steadily downward from a peak after the start of the war.