Inflation Anomalies: The economy is experiencing a disinflationary shock that nobody believes in

The disinflation shock…

Inflation in Russia slowed to a record low in April and the first half of May. According to Rosstat data, April inflation stood at 0.14%, whilst May’s three-week figure was 0.04%. Rosstat recorded negative price trends twice in May, with prices failing by a symbolic 0.02% over the two-week periods ending on 4 May and 18 May respectively. Projected over the year, the observed pace of price growth is close to 2% (2.4% in April), which is around half the Central Bank’s 4% target.

In the entire history of observations since 1991, such low April–May inflation has never been recorded. A monthly inflation rate of 0.15% or lower has occurred only 30 times over the past 20 years, 27 of which fell in the summer months and early autumn, the traditional seasonal period of price deceleration. As is typically the case in such periods, but unusually for spring, low inflation in April and May this year was driven primarily by the food basket, particularly fruit and vegetables. Food prices fell by 0.2% to 0.3%, while fruit and vegetable prices declined by 2% to 3% (the Ministry of Economic Development’s estimates for the week of 13–18 May were 0.26% and 2.2% respectively). Meanwhile, aggregated price indices for non-food goods and services also remained at low levels, at 0.26% and 0.47% respectively in April.

This trend is all the more surprising given the increase in VAT, which would normally be expected to push prices higher. However, after a brief spike in January (1.6%), inflation began to fall rapidly (0.73% in February and 0.6% in March). Experts at the Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF) have described what is happening as a disinflationary shock.

One of the factors behind the shock is almost certainly the continued strengthening of the rouble. In May, the US dollar averaged 73.9 roubles, compared with 80.2 roubles in May last year, when the currency was already considered relatively strong. An additional appreciation of almost 9% represents a significant gain in purchasing power, increasing import competition against domestic production. According to data on the balance of payments, goods imports in the first quarter of 2026 increased by 10% year on year, from $66.4 billion to $73 billion. Customs estimates show a slightly lower increase of 6.3%, from $62.9 billion to $66.9 billion. At the same time, according to the Federal Customs Service, food imports rose by 7%, while textiles and machinery, equipment and transport vehicles increased by 12%. The sharp slowdown in food price growth may therefore be partly explained by greater import availability in certain categories amid stagnant demand, as indicated by Sberindex data. In this case, the strengthening of the rouble as a disinflationary factor will continue to operate in the coming months, whilst imports will continue to grow.

Weak demand is the second likely factor behind the anomalous slowdown in inflation. Growth in real disposable income in the first quarter, according to Rosstat’s estimates, stood at 1.5% year-on-year, compared with growth of 7.5% in 2025. This represents a fairly sharp shift: most likely, income growth persisted in certain segments of the labour market, while in others real incomes declined. In any case, the break in the trend was reflected in a marked deterioration in social and consumer sentiment in the first quarter of this year. The inFOM Consumer Sentiment Index fell by 5 points between April and December 2025, from 109 to 104, and then dropped by a further 10 points between December 2025 and April 2026. Four points of that decline came in the April survey alone. The index was last at such a level at the end of 2022. It is possible that the income situation deteriorated further in April. In another FOM survey, the proportion of those surveyed who believed that their family’s life would improve within the next six to twelve months fell immediately from 38% to 29%. The abrupt deterioration in income dynamics and the collapse in consumer sentiment have occurred against the backdrop of a cumulative contraction in consumer lending under conditions of high interest rates. Since July 2025, year-on-year growth in consumer loans has remained in negative territory, according to Central Bank statistics.

Thus, the suppressive effect of the Central Bank’s high interest rate policy on inflation through weaker demand and constrained consumer lending has coincided with two additional factors: the strengthening of the rouble and intensified import competition, together with declining incomes across a range of social groups.

…which nobody believes

At the same time, neither the public, nor experts, nor the economic authorities believe that the disinflationary trend is sustainable. Annual inflation slowed steadily from above 10% in the first half of 2025 to 8% in September, 6% in January 2026 and 5.6% in April. As of 18 May, the figure stood at 5.4%. However, whereas all inflation components declined during the second half of 2025, including food, non-food goods and services, the profile of disinflation changed at the beginning of 2026. The rapid slowdown was driven primarily by food prices, while prices for services and non-food goods, by contrast, began to show renewed upward momentum at the start of the year. In its commentary on inflation, the Central Bank also emphasised that the inflationary backdrop in services remains high.

Figure 1. Annual inflation trends and their components, 2023–2026

This change in the profile of disinflation indicates an unstable trend. This point is further developed in the inflation review prepared by the CMASF. The dramatic slowdown in price growth appears anomalous and unstable, with different categories of goods displaying divergent dynamics. Moreover, while headline inflation shows a clear pattern of a ‘downward shift’ in the relationship between maximum and minimum inertial forecasts, core inflation has, by contrast, experienced an ‘upward shift’, meaning that the new level of inflationary trends is higher rather than lower than previous levels, according to the review based on weekly inflation data at the turn of April and May.

Scepticism regarding the sustainability of the trend has also been expressed by the MMI Telegram channel, which is closer to the Central Bank. The channel points to instability in macroeconomic indicators: rapid growth in budget expenditure and the budget deficit, which reached 1.3 trillion roubles in April, together with the acceleration in the growth of the M2 money supply, which has exceeded the Central Bank’s forecast, suggest a likely renewed acceleration of inflation after a certain lag.

Low spring inflation at the start of 2026 is accompanied, however, by another anomaly: Russian citizens’ subjective assessments of inflation have not only failed to respond to the disinflationary shock, but have almost completely ignored the steady decline in inflation over the past ten months. According to the May inFOM survey, the public’s assessment of observed inflation rose from 14.6% in April to 15.1% in May, while inflation expectations remained almost unchanged throughout the period at around 13% annually, even as inflation measured by Rosstat declined from 9% to 5.5%. Among lower-income groups, specifically those without savings, assessments of observed inflation declined for most of 2025 but have risen steadily since October, reaching 16.4% in May 2026, compared with 15.1% in October.

Figure 2. Public perceptions of observed and expected inflation and actual inflation, 2014–2026

Perceptions of observed inflation and inflation expectations in public surveys almost always exceed actual inflation levels, as Central Bank analysts rightly point out in their April commentary: people tend to notice price increases while overlooking periods of price stability. However, across the entire observation period since the beginning of 2014, the average gap between actual inflation and perceived and expected inflation amounted to 7.2 and 4.3 percentage points respectively. By mid-2025, the gaps stood at 7 and 6 percentage points, but over the past six months they have widened to 9.1 and 7.6 percentage points.

A significant divergence between perceived and actual price growth, as shown in Figure 2, is typically observed either during inflationary spikes or during disinflationary shocks. This was the case, for example, during the inflation surge and subsequent rapid disinflation associated with the 2015–2016 crisis, as well as during the second inflationary shock and subsequent disinflation in 2021–2023. However, in both these episodes, a correlation between the indicators can be observed: the perceptions of inflation and inflation expectations eventually followed the trajectory of actual inflation, albeit with a lag. In 2026, a different picture has emerged. Actual inflation has slowed sharply, while perceived inflation has remained at the elevated levels of the previous year and has even edged higher, meaning that the two trajectories are diverging. In March and April, perceived inflation was 2.6–2.7 times higher than the annual inflation rate, whereas the average deviation in 2022–2024 was 2.1 times, as acknowledged by the authors of the Central Bank’s analytical commentary themselves.

The inflationary anomalies of spring 2026 reflect the economy’s transition into a new phase. The growth bubble of 2023–2025 has burst, and the economy is contracting, at least in its civilian sector. Alongside the collapse of the growth bubble, income growth has also faded, leading to changes in consumer behaviour, weaker demand and a rising share of lower-income consumers who perceive inflation more acutely. At the same time, budget expenditure continues to rise independently of revenue growth, creating additional inflationary pressure. As a result, Central Bank policy remains focused on restraining demand. Meanwhile, the strengthening of the rouble and the increase in its purchasing power are intensifying competition from imports in the context of a stagnant domestic market. In these circumstances, an economic situation in which budget expenditure continues to expand while the economy enters recession is regarded by economic agents as fundamentally unsustainable.