Russian Central Bank analysts note mounting pro-inflationary pressure amid rising costs, demand
MOSCOW. July 13 (Interfax) - Pro-inflationary pressure is mounting amid growing producer costs and rapidly rising demand that cannot be satisfied quickly owing to a number of restrictions, the research and forecasting department of the Central Bank of Russia (CBR) said in its Talking Trends bulletin.
"Consumer price growth is becoming increasingly resilient, consolidating above the 4% annualized basis as seasonally adjusted. On the one hand, producers of goods and service providers are facing growing costs, including because of the persistent barriers to imports. On the other hand, they note rapidly rising demand that they are unable to satisfy promptly owing to production, labor, and other restrictions. The result is mounting inflationary pressure," the CBR's analysts said.
The CBR's analysts believe that the process will likely continue to unfold in the coming months, taking into account the inertia of macroeconomic trends.
"A decrease in the budget and/or credit impulse is required in order to neutralize it. A possible increase in inflation expectations owing to the ruble's recent weakening could possibly become an additional pro-inflationary factor," the CBR's analysts said.
The pass-through effect of the ruble weakening to consumer prices remains limited, the CBR's analysts note. Meantime, the results of a survey of manufacturers indicate growth in their costs owing to the weakening of the ruble in June. "Growth could translate into selling and retail prices as demand grows. Growth could gradually spread to a wider range of products, where the pass-through effect of costs to final prices was previously limited in order to attract consumers amid increased savings sentiment," the CBR said.
The upward inflation trend that formed in the fourth quarter of 2022 continued to develop in the first quarter of 2023, and intensified even more in May-June. The dynamics of prices began to exceed the annual trajectory of price growth, corresponding to 4%, the CBR's analysts emphasize, who are paying attention to the increasing role of the stable components of price growth.
Demand factors were primarily the cause of mounting inflationary pressure, the CBR's analysts emphasize. According to their estimates, domestic demand in the economy has already exceeded the highs of the fourth quarter of 2021, having fully recovered from the recession. Meantime, growth in demand exceeds the economy's ability to satisfy it.
"In this situation, it is necessary that the current seasonally adjusted price growth rates decelerate and begin to correspond to the 4% trajectory by the end of 2023 in order to achieve the inflation target in 2024. However, it takes time to reverse the existing pro-inflationary trend, and to overcome its inertia," the CBR's analysts note, recalling that decisions on monetary policy affect prices with a delay of three to six quarters.
"Therefore, tightening of monetary policy should occur before inflation accelerates. Otherwise, considerably greater tightening of monetary policy would be required. An increase in the real, price-adjusted, interest rate exerts a cooling effect on demand and prices. When there are heightened rates of price growth, the nominal interest rate should rise substantially more than amid moderate price increases. This is owing to both a higher rate of price growth, as such, and to the likely increase in inflation expectations following the increase. In this situation, the real interest rate increases further, which is able to return inflation to the goal," the research and forecasting department of the Central Bank of Russia emphasizes.