EconomistIn a strong economy, price pressure can endure for a long time
While inflation has cooled almost everywhere, in Russia it is hotting up. Consumer prices rose by 9.5% year on year in December, up from 8.9% the previous month and uncomfortably above the central bank’s target of 4% (see chart). The prices of fruit and vegetables have risen by more than 20% on average in the past year. In a normal country, this sort of high inflation would be unsustainable. But Russia is not a normal country.
The latest bout of inflation is the product of both external and internal factors. In recent months, as the West has tightened sanctions, the rouble has depreciated, raising the cost of imports. Russian importers hoping to supply customers with American phones or Italian handbags have to be increasingly creative, which adds to their costs. There is circumstantial evidence that French vintners are skirting sanctions by selling to unscrupulous middlemen in Austria and Greece, among other places. Even so, the price of a bottle of the 2006 Clos de Tart, a blowout Burgundy at White Rabbit, Moscow’s finest restaurant, has risen by close to 30% since Vladimir Putin invaded Ukraine.
Conscription, meanwhile, has created a labour shortage, exacerbated by the fact that many Russians have fled the country. Unemployment, at around 2% of the workforce, is the lowest on record. This, in turn, has forced employers to compete hard for workers. In 2024 nominal pay rose by an astonishing 18%, putting further upward pressure on prices. The government has also implemented enormous fiscal stimulus, lifting spending on defence, welfare and infrastructure. Strong demand, says the central bank, “still exceeds companies’ capacities to expand supply”.
A tussle is now under way in Russia’s policymaking establishment. The central bank—stuffed with orthodox economists—is desperate to cool prices. On February 14th, following a monetary-policy meeting, it is expected to keep interest rates at 21%, their highest since the early 2000s. It has also tightened credit rules. But those close to Mr Putin have other ideas. The vast military budget keeps coming in much higher than planned, and now equals around 7% of GDP. The government is doling out huge sums, including as signing-on bonuses to soldiers and compensation to families when their relatives are killed in action. It is also pressganging the private sector into funding the armed forces, which amounts to a form of stimulus.