Unequivocal Double-digit Inflation: Russian inflation will cross the 10% threshold by the end of January, and this will have consequences

A world of double-digit inflation

As of January, the Russian economy has officially crossed the threshold into double-digit inflation. Rosstat reported that in the first 27 days of January, prices rose by 1.14%. With an average daily increase of 0.042%, this means that by the end of the month, inflation will reach 1.31%. As a result, the actual annual inflation rate (from 31 January, 2025, to 1 February, 2024) will be exactly 10%.

In December, Rosstat glossed over the numbers. The agency reported that prices rose by 1.32% for the month and 9.52% for 2024 overall. However, the latter figure appears artificial: on 25 December, Rosstat recorded that prices had increased by 1.3% from 1-23 December . This implies that inflation for the final week of December was only 0.02%, even though in the previous three weeks, it had been rising at a steady 0.05% per day. It is possible that Rosstat not only manipulated the December data to produce a lower annual inflation figure but also shifted the price growth from late December into early January. Yet this does not increase trust in its reports – nor does it change the underlying reality. As the mother of Denis, the protagonist of a well-known Soviet-era children's book, used to say: 'Everything hidden eventually comes to light.' Official annual inflation in Russia is now in double digits.

At the same time, seasonally adjusted projections by the Central Bank indicate that December’s inflation rate corresponds to an expected annual rate of 14.2%. January’s figure will be about one percentage point lower. However, both the recorded and projected annual inflation rates at the beginning of February remain in double digits. Inflation expectations among the public, based on an ‘inFOM’ survey conducted in mid-January, have risen to 14%, although their growth has slowed compared to the previous month. Businesses, according to the Central Bank’s January business climate survey, expect an average annual price increase of 10.8% over the next three months (compared to 10.6% in December 2024). At the same time, while overall inflation expectations among businesses have stabilised, they remain on an upward trajectory in the consumer segment of the manufacturing sector. In retail, expected price growth has reached 15.2%. In their annual business plans, companies now anticipate an average inflation rate of 10.7% (compared to 9.4% a year ago), while those in construction, trade, and services expect inflation between 11.3% and 11.5%. This is the world of double-digit figures.

Business expectations for product price growth over the next three months, 2023-2024

Taken together, January data suggests that price dynamics have stabilised at high levels compared to December, rather than accelerating further. However, overcoming inflation’s inertia may prove challenging. Many economists view double-digit inflation as a key benchmark. While emerging economies often experience strong growth alongside moderate inflation (6–9%), double-digit inflation typically has a significantly negative impact on economic activity.

Economist Oleg Vyugin warns in a recent article on Re:Russia that the Russian economy is on the verge of galloping inflation (a term often used synonymously with double-digit inflation). This refers to inflation that has gained enough momentum to become resistant to monetary policy measures. The fact that businesses are incorporating double-digit inflation into their financial planning illustrates this phenomenon. It signals a high likelihood that, in the face of declining demand and restricted access to credit, companies will opt to cut production rather than reduce prices to avoid losses. Additionally, given labour shortages, businesses will be forced to adjust wages in line with inflation, further fueling the inflationary spiral.

The climate has not changed enough

The wave of business optimism that lasted from late 2022 to mid-2024 is now firmly in the past. For five consecutive months, Russian businesses have reported increasing pessimism, according to the Central Bank’s business climate monitoring. The Central Bank calculates its business climate index as the average of companies' assessments of current conditions and their expectations. As previously noted (→ Re:Russia: Optimism Inflation), business expectations consistently exceeded current assessments throughout the observation period. Over the decade preceding the war, the average gap between these two indicators was 15 points. Thus, a more accurate measure of economic trends is the index of current conditions, stripped of optimistic expectations.

Since August, this index has remained in negative territory across the economy, meaning pessimistic assessments now outweigh positive ones. The downturn has affected nearly all sectors, with the sharpest declines seen in construction and trade (averaging –6.4 and –5.5 points, respectively, over the past five months). The service sector is performing slightly better at –2.4 points. Since mid-2022, a significant gap has emerged between consumer and investment-driven industries within manufacturing. The latter – including the defence sector – displayed excessive optimism, while consumer industries remained in positive territory only from mid-2023 to early summer 2024. However, over the past six months, investment-sector sentiment has deteriorated rapidly, now falling below the levels of consumer-focused industries.

Dynamics of the Central Bank's business climate indicator for the economy as a whole, as well as in the consumer and investment sectors of the manufacturing industry, 2021-2024

Dynamics of the Central Bank's business climate indicator in construction, trade and services, 2021-2024

However, these index values are by no means indicative of a crisis but rather suggest stagnation (the only sector arguably in crisis territory – typically starting around -6 to -7 points – is construction). Some commentators even believe that the current business climate assessments indicate that the interest rate has had insufficient impact on business activity dynamics. Interestingly, investment activity assessments remain in positive territory (again, with the exception of construction), which, according to Central Bank analysts, suggests investment growth – albeit at half the pace observed six months ago.

Indeed, business credit activity has slowed significantly under the pressure of tight monetary policy but has not yet been paralysed, according to the Central Bank’s monitoring of the banking sector. In December, ruble-denominated business loans grew by 1% month-over-month (0.7 trillion rubles) following a 1.5% increase in November. By year-end, total growth reached 17.9%. However, more than half of the December increase came from sectors less sensitive to rising interest rates: nearly half was driven by funding for ongoing investment programs, while another 16% came from residential construction, where relatively low rates persist due to project financing mechanisms. Additionally, corporate funds continued to grow – mainly due to government budget inflows, according to Central Bank analysts.Meanwhile, the consumer credit portfolio shrank slightly (-2% compared to November), while household deposits surged by 3.9 trillion rubles in December and by a staggering 11.9 trillion rubles (+26% year-over-year) over the course of 2024. This amount represents 85% of all consumer loans issued to the population, which increased by 11.2% in 2024 compared to 2023. As a result, household purchasing power rose by 37% in 2024 and continues to grow. Russian industry, however, is struggling to meet this demand.

In general, despite a marked deterioration in business conditions, the economy still carries a significant overhang of liquidity accumulated during the prolonged period of overheating. This excess liquidity simultaneously sustains business activity – despite extremely high interest rates – and fuels further price increases. The rebalancing process needed to bring demand in line with the supply of consumer goods and services will likely require a much deeper economic downturn.

At the same time, curbing inflation will be complicated by two additional factors. First, labour shortages, and second, the weakening of the ruble. The latter played a significant role in price dynamics at the end of 2024, according to the Central Bank's review of consumer price trends. Given that domestic demand significantly exceeds the production capacity for consumer goods, imports play a crucial role in balancing the market. As a result, price sensitivity to currency depreciation may be higher than usual – particularly in contrast to periods when sharp ruble devaluations coincided with declining domestic demand (as seen during oil price collapses). Meanwhile, both trade and current account surpluses narrowed sharply at the end of the year, according to balance of payments data, which will further contribute to ruble depreciation.

This combination of factors makes it likely that double-digit inflation will either become entrenched in the Russian economy or continue to pose a persistent threat over the coming months, significantly influencing both consumer and producer behaviour.