The Russian Central Bank’s expectations of a major pick up in inflation in December and over the course of the New Year-Christmas January holiday have been confounded, with the annual rate of inflation continuing to fall.
Inflation was slightly higher in December than in previous months there was a fractional uptick in inflation during the week of the January holiday. However this is invariably the case in Russia, and the increases in inflation in December and during the January holiday were minor and well below the Central Bank’s expectations.
The result is that Russia dramatically overshot its 2017 inflation target, with the Central Bank aiming for annualised inflation of 4% in 2017 whereas inflation the actual inflation rate in Russia in 2017 was just 2.5%.
Reflecting the smaller than usual rise in inflation in Russia over the January holiday, the annualised inflation rate in Russia has now fallen still further and now stands at 2.3%. Core inflation, that is inflation with seasonal factors deleted from the measurements, is just 2.1%.
Not only is this the lowest inflation rate Russia has seen since the fall of the USSR, but I strongly suspect that it is the lowest actual inflation rate Russia has seen since the early 1970s. Whilst the USSR sought to fix prices and never published inflation statistics (it claimed that in a planned economy no inflation existed) the USSR did suffer from inflation, which however manifested itself not in visible price increases but in shortages, which from about the mid 1970s began to grow more common.
Putting that historical point to one side, the reduction in inflation in Russia is a very considerable policy achievement, one which the overwhelming majority of economic commentators both in the West and in Russia doubted would be achieved. Suffice to say that the annual inflation in Russia is now lower than in Britain (2.8%) and roughly the same as in the US (2.13%). Only in the eurozone is it significantly lower at 1.4%.
The major difference between the situation in Russia and the situation in Britain and the US is that whereas in Russia the Central Bank’s key interest rate is 7.75%, in Britain it is 0.5%, in the US it is 1.5% and in the eurozone – which in 2017 was still engaging in quantitative easing – it is 0%.
In other words real interest rates in Russia are still over 5% even as inflation continues to fall, whereas in the Western economies despite all the talk about monetary tightening real interest rates are still negative.
These high real interest rates in Russia underscore the underlying toughness of the Russian economy. If they were replicated in any Western economy they would undoubtedly cause a recession.
Having said this, it remains my view that interest rates in Russia are too high. November saw a sharp shock fall in industrial production. Though the Economics Ministry has expressed confidence that industrial production dynamics will be better in December, and though the overall economy continues to grow, November’s shock decline should serve as a warning that a genuine relaxation in monetary conditions is overdue.