Russia's central bank has warned that the recent surge in inflation is spreading beyond a temporary fuel price shock, while economists have sharply raised their forecasts for inflation and interest rates, complicating Kremlin hopes for further monetary easing. (chart)

The Bank of Russia released its monthly Talking Trends report on July 15, including its June inflation review, the latest What Trends Say bulletin, a macroeconomic survey and its business activity monitor.

Together they suggest that while the recent spike in inflation was initially driven by temporary disruptions in the fuel market, policymakers are becoming increasingly concerned about the risk of second-round effects spreading through the wider economy.

Headline inflation accelerated sharply in June, with the seasonally adjusted monthly price growth rate rising to an annualised 10.6%, up from 2.0% in May. The central bank attributed much of the jump to "temporary supply disruptions at gas stations", noting that excluding volatile components such as fuel, fruit and vegetables and certain services, annualised consumer price inflation would have been limited to 4.9%.

However, economists in the central bank's Research and Forecasting Department adopted a more cautious tone in the Talking Trends bulletin, warning that the impact of higher fuel prices is no longer confined to petrol stations.

"The direct impact of rising fuel prices combines with influence on the prices of other goods and services – through costs and a squeeze on production opportunities in other sectors," the report said. It added that "these trends are likely being reflected in July's flash data," with weekly inflation accelerating and a growing number of consumer price components now recording rapid price increases.

Despite those concerns, the central bank argues that underlying inflationary pressures remain weaker than last year thanks to two years of tight monetary policy. According to the report, "core inflationary pressures in the economy are lower than last year," while "disinflationary drivers" had become increasingly visible during the second quarter before being temporarily overwhelmed by the fuel shock.

The regulator nevertheless cautioned that risks have shifted to the upside. It warned that forthcoming budget revisions mean "the public sector is likely to make a greater contribution to aggregate demand over the timespan of monetary policy than previously expected," while consumer spending remains resilient, inflation expectations elevated and labour market tightness is easing only gradually.

As a result, the Bank of Russia concluded that "for inflation to trend back to 4% in a sustainable way and stay close to the target in the future, a calibrated monetary policy path is needed, which takes into account both current conditions and changes in the risk balance for future inflation."

The central bank's latest macroeconomic survey for July suggests private-sector economists are becoming less optimistic. They raised their forecast for inflation at the end of 2026 by 0.9 percentage points to 6.2%, from 5.3% previously. Inflation is now expected to average 4.6% in 2027, up from 4.4%, with the official 4% target not expected to be achieved until 2029.

 

CBR macroeconomic Survey results: July 20261
	2021 (actual)	2022 (actual)	2023 (actual)	2024 (actual)	2025 (actual)	2026	2027	2028	2029
CPI (%, Dec to Dec of the previous year)	8.4	11.9	7.4	9.5	5.6	6.2 (5.3)	4.6 (4.4)	4.1 (4.0)	4.0 (4.0)
CPI (% year-on-year, average for the year)	6.7	13.8	5.9	8.4	8.7	6.0 (5.4)	4.9 (4.5)	4.1 (4.2)	4.0 (4.0)
Key rate (% per annum, average for the year, including weekends)	5.7	10.6	9.9	17.5	19.2	14.5 (14.1)	12.2 (10.6)	10.0 (9.0)	8.6 (8.1)
GDP (%, YoY)	5.9	-1.4	4.1	4.9	1	0.6 (0.7)	1.3 (1.5)	1.7 (1.7)	1.8 (1.8)
Unemployment rate (%, average for the year)	4.8	3.9	3.2	2.5	2.2	2.2 (2.3)	2.5 (2.5)	2.7 (2.6)	2.8 (2.7)
Nominal wages (%, YoY, average for the year)	11.5	14.1	14.6	19	14.3	10.2 (9.5)	8.0 (7.8)	7.0 (7.0)	6.5 (6.5)
Consolidated budget balance (% of GDP for the respective year)	0.8	-1.4	-2.3	-1.6	-3.9	-3.2 (-2.6)	-2.5 (-1.9)	-1.9 (-1.5)	-1.5 (-1.4)
Exports of goods and services (billions of US dollars per year)	550	641	465	477	468	510 (525)	483 (493)	489 (491)	497 (495)
Imports of goods and services (billions of US dollars per year)	377	347	380	383	400	420 (420)	430 (432)	439 (439)	450 (448)
USD / RUB rate (RUB per USD, average for the year)	73.6	67.5	84.7	92.4	83.4	78.4 (78.1)	86.6 (86.2)	92.7 (94.3)	95.8 (97.8)
Oil price for tax purposes2 (US dollars per barrel, average for the year)	69	76	63	68	56	63 (70)	58 (60)	57 (59)	57 (57)
Indicators calculated based on responses received:
Real key rate3 (% per annum, average for the year, including weekends)	-2.7	-1.3	2.5	8	13.6	8.3 (8.7)	7.4 (6.1)	5.7 (5.0)	4.6 (4.2)
GDP (cumulative level, 2021 = 100)	100	98.6	102.6	107.7	108.7	109.4 (109.5)	110.9 (111.2)	112.8 (113.0)	114.6 (115.3)
Real wages4 (%, YoY, average for the year)	4.5	0.3	8.2	9.7	5.2 (4.4)	4.1 (3.9)	2.5 (3.2)	2.6 (2.7)	2.3 (2.5)
Real wages (cumulative level, 2021 = 100)	100	100.3	108.5	119.1	125.2 (124.3)	130.4 (129.1)	133.7 (133.3)	136.9 (136.7)	139.8 (140.2)
Trade balance (goods and services) (billions of US dollars per year)	173	293	86	94	68	85 (102)	59 (63)	50 (58)	48 (51)
source: CBR

 

Expectations for interest rates have also been revised higher. Economists now forecast an average key rate of 14.5% this year, 12.2% in 2027, compared with 10.6% previously, and 10% in 2028, up from 9%.

Meanwhile, the Bank of Russia's Business Climate Indicator fell to minus 3.6 points in July from plus 0.9 points in June, its sharpest monthly decline since Russia's partial mobilisation in September 2022. Russian analysts say the deterioration reflects the fuel crisis and points to a marked slowdown in economic activity, with weakening demand coinciding with rising production costs.

The reports arrive just days after President Vladimir Putin, for the second time in a month, publicly called for lower interest rates provided macroeconomic stability is preserved. While markets still expect the central bank to trim its key rate by a further 25 basis points to 14% at its July 24 meeting, the latest publications suggest policymakers are preparing the ground for a shallower easing cycle than many in government had hoped, balancing evidence of slowing underlying inflation against mounting risks that the fuel shock could become more deeply embedded in the economy.