Consumer prices rose again in October to 6.7% year on year, according to the latest figures from RosStat.

The rest of the economy is performing well thanks to the so-called military Keynesianism boost from massive war-spending, leading Prime Minister Mikhail Mishustin to declare “the worst is over” in September, but rising inflation remains the fly in the ointment.

After the ruble fell to RUB100 to the dollar in August, Central Bank of Russia (CBR) Governor Elvia Nabiullina was forced to put through a whopping 350bp rate hike on August 15 to put a floor under the currency’s value. That was followed by another surprise 200bp rate hike in October – 100bp more than analysts were expecting – as the regulator moved aggressively to rein in the persistent inflation. Analysts say that at least one more rate hike is on the cards before the end of this year or the start of next year.

“The further chunky rise in Russian inflation to 6.7% y/y in October provides additional evidence that demand is outstripping supply in Russia’s economy. We think that inflation will continue to rise over the coming months and that the CBR will have to hike interest rates further early next year,” Nicholas Farr, an emerging Europe economist with Capital Economics, said in a note.

October’s inflation result was higher than September’s reading of 6.0% y/y, and in line with the consensus forecast among analysts. In month-on-month terms, prices increased by a solid 0.8% – the second strongest reading so far this year, Capital Economics reports.

The breakdown showed that services inflation picked up for the second consecutive month from 9.7% y/y to 9.9% y/y, while non-food goods inflation rose from 4.6% y/y to 5.1% y/y. Food inflation recorded another strong increase from 4.9% y/y to 6.0% y/y.

Alongside demand-supply imbalances (which are partially attributable to the war), the weaker ruble is also playing a role – the currency has fallen by around 20% against the dollar year-to-date.

Nabiullina is in a bind as the Kremlin is pouring ever more money into the war machine and the conscription of hundreds of thousands of men into the military has made the labour market very tight. That has forced up nominal wages as companies struggle to keep factory lines staffed, adding to inflation. Monetary policy has little impact on these inflationary forces.

“While the CBR’s statement dropped its guidance about considering further rate increases at upcoming meetings, we think that interest rates are yet to reach a peak,” says Farr. “The tightening cycle may be paused at the next meeting in December, but we think the CBR is not fully factoring into its forecasts the further rise in inflation that will come through next year. We expect another 100bp hike in the first quarter, taking the policy rate to 16.00%.”

The Kremlin’s efforts to force prices down are having little effect

In July 2023, when it was already clear that inflation in Russia was accelerating sharply, Vladimir Putin, at a meeting on economic issues, called rising prices the main risk for the country’s socio-economic development, and named the government responsible for curbing this growth.

“It is important to maintain price stability in our economy and ensure a balance of supply and demand. Here the leading role is given to the government. It should contribute to the maximum expansion of the production of goods and services,” Putin said as cited by The Bell.

However, no measures to stimulate the expansion of production can quickly increase supply, which is unable to keep up with demand and is driving up prices.

The real responsibility for inflation lies with the Central Bank, which just three days before Putin’s speech began to raise rates in large steps. But the government could not ignore the “main role” assigned to it, especially since during the previous round of inflation acceleration in 2020-2021 it had already gained experience in combating rising prices with the help of various restrictions in addition to tighter monetary policy.

In recent months, the Russian government has taken a series of populist administrative measures aimed at curbing rising prices, although some of these decisions have led to unintended consequences that actually sent prices up, not down, The Bell reports.

One of the most notable instances involves fuel prices. The Ministry of Finance, in an attempt to reduce budget expenditures, decided to cut in half the compensation provided to oil companies for selling fuel domestically at lower prices than for export (“the damper”), starting from September 1.

With high global prices and increased domestic demand due to military needs, these compensation payments had become a significant burden on the budget. In 2022, oil companies received RUB2.2 trillion ($21.7bn) in compensation, a whopping 3.5 times more than in the previous year.

However, the decision to change this long-standing, non-market price regulation proved to be problematic. It resulted in fuel shortages in the Russian market, causing prices to soar. To alleviate the situation, the government had to ban fuel exports and swiftly reinstate the compensation payments to oil companies.

Another noteworthy measure was the ban on poultry meat exports, which was enacted with populist flare. During a Zoom call on October 25, President Putin asked the Minister of Agriculture, Dmitry Patrushev, about rising chicken prices in Russia. Patrushev was in a chicken coop during the call. Putin praised Patrushev and questioned the 27% increase in chicken prices. Patrushev assured that measures to reduce prices were already in progress.

The very next day, the Ministry of Agriculture proposed temporarily banning poultry meat exports from Russia. Unlike the fuel market, such an export ban was unlikely to have a significant impact on domestic prices but would affect producers.

Embracing market regulation through export restrictions, the Ministry of Agriculture soon introduced another ban, this time on the export of durum wheat used in pasta production. This market segment is relatively small, accounting for just 100,000 tonnes per season – 300 times less than Russia's entire wheat exports. Nevertheless, it was a convenient vehicle for showcasing the Kremlin’s efforts to control prices for a socially significant product.

In early November, the fight against high prices extended to the retail sector. Although there were no high-profile agreements on price controls with retailers, major chains, including Auchan, began taking independent actions in response to pressure from the Ministry of Industry and Trade and the Federal Antimonopoly Service. Auchan, for instance, sent letters to suppliers, urging them not to raise prices until the end of the year and threatening to report any violations to regulatory authorities.

Economists interviewed by The Bell were unanimous that the administrative controls on prices will have little effect on prices.

Russian economic regulation is smarter than it might seem – PM Mikhail Mishustin's government is still a long way from regulating retail prices using Soviet methods, The Bell reported.

Despite the occasional populist decisions that make headlines and cause outrage among experts, in general such measures are now used even less frequently than before the war.

“But the main danger for the Russian economy is not that the authorities will begin to manage it using Soviet methods. Because of the war, the government, by definition, cannot act consistently, so with one hand it approves a budget with an increase in spending by 26%, and with the other hand it tries to fight inflation by imposing export restrictions on business. The war will inevitably further unbalance the economy, and sooner or later it will end in a big crisis – but the margin of safety accumulated over the years makes this process slow and unpredictable,” The Bell opined.