Russia’s economy is in a death spiral: Financial life

Inflation in Russia is accelerating again. For example, the level of food prices has risen by 14% since the beginning of the year, and prices are expected to rise further by 5% to 40% next autumn.

The rapid increase in prices affects not only food, but all product groups and more broadly society as a whole. In addition to products and services, prices in internal markets such as gas, electricity and logistics are rising by more than ten percent per year.

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The Russian Central Bank has long announced that its main goal is to combat price increases and curb inflation to 4% by 2025. To achieve this goal, the central bank has raised its key interest rate to 18%, and according to experts, the 20% level can be achieved as early as next autumn.

However, given current price developments, the central bank’s goal seems downright utopian.

With tight monetary policy, the central bank may be able to influence demand inflation, but it seems to have no tools when it comes to cost inflation.

Inflated ruble by one fifth

On the demand side, the rapid growth of citizen credit has accelerated inflation, which the central bank is trying to limit through its measures. In early July, the government also cancelled the interest rate subsidy program, which had accelerated the development of inflation. The program offered buyers of new apartments the opportunity to obtain a subsidized and fixed-rate mortgage at 8%.

The end of the program increased annual interest rates on home loans by more than 20%, and to offset this drastic change, rents for rental apartments rose rapidly over the summer.

In particular, the reduced choice of imported products and the increased financing and logistics costs for importers have also pushed up the prices of imported products. The supply of high-quality Western products has collapsed, and consumers are prepared to pay higher prices for them.

As a result of the war in Ukraine, the amount of money denominated in rubles in the national economy has grown rapidly. The money supply (indicator M2) has been growing by about 20% per year. It is reasonable to assume that the central bank’s monetary stimulus is also ongoing.

Therefore, the central bank is promoting inflation on the one hand and trying to curb it on the other.

Labor shortages have been a chronic phenomenon

Wages are also increasing by 20 percent each year. The average wage in Russia is currently about 900 euros per month, and chronic labor shortages are causing wage increases and promoting cost inflation.

Wages are rising rapidly, especially in fields directly or indirectly related to the war in Ukraine. However, overall wages in “civilian occupations” lag behind inflation. The growth of the pension index has also failed to keep pace with annual inflation.

The coming autumn and winter season could prove decisive for Russia’s future economic development. Will the government and the central bank get the inflation threat in balance? Or has hyperinflation developed into a death spiral lurking around the corner?