The Bank of Russia uses its monthly inFOM survey as a guide when making decisions about monetary policy. According to the poll conducted in March, Russian residents expect inflation to fall over the next year. The median estimate of expected inflation over the next twelve months fell from 12.2% in February to 10.7% in March, the lowest level since March 2021. In contrast, in March 2022, when Russia invaded Ukraine, expected inflation peaked at 16.7%. It then steadily decreased to 12%, and then plateaued at around that level. In July, expected inflation in Russia declined to 10.8%, but following the announcement of ‘partial mobilisation’, it increased once again. Over the same month, observed inflation did decrease, but only marginally, from 15% to 14.3%. Since May 2022, observed inflation has been decreasing at roughly this pace, after reaching a peak of 25.1%. As citizens have witnessed this downward trend in the rate of current observed inflation over many months, it has led them to project this trend into the future. This has resulted in a faster decline in expected inflation. However, such expectations may fail to materialise in reality. While the public expects prices to fall, businesses, particularly in the retail sector, anticipate a rise in prices.
In March, the consumer sentiment index, which is a crucial composite measure, reached 103.8 points — a 1.6 point increase from February. This is the highest value the index has recorded in almost five years, since May 2018. At the same time, there was a slight decline in people’s evaluations of the current state of affairs. Overall growth was propelled by positive expectations, as the corresponding index value increased to 114.1 points, up 2.8 points from February. The survey’s participants currently have a more favourable outlook when it comes to both their personal financial situation and the overall economic picture in the country.
As we have previously discussed, optimistic expectations without a solid economic basis were a common feature throughout most of 2022. However, these expectations have had little impact on levels of consumption. In March, the InFom survey recorded an increase in the tendency to save, with 57.3% of respondents opting to save rather than spend, up 1.4 percentage points from February. This is the highest value recorded since March 2021. Further, an increasing number of Russians are opting to keep their savings in cash, with 36% of respondents now choosing this option, while 37% prefer to keep their money in banks. Meanwhile, the large purchases index, which had seen some growth in December and January, stagnated in February and March.
‘An improvement in consumer sentiment usually leads to an increase in consumer activity, which often increases inflationary pressure,’ notes the MM Telegram channel in their analysis of the poll’s results, ‘So far we have not seen clear signs of this actually happening, but given the very high rate of savings, the surge in household spending at some point may turn out to be quite strong.’
We believe, however, that there may be a different explanation underlying the paradox of improved consumer sentiment and expectations for the future of the economy coupled with the stagnation in spending. The graph below shows hallmark signs of the current crisis: ordinary citizen’s reluctance to make large purchases, with a widening gap between the consumer sentiment index and the large purchases index. This may in fact be due to the deterioration in the range of large purchases available to citizens in terms of price and quality, due to the imposition of sanctions and the departure of Western brands out of Russia. As a result, citizens are saving more in the hope that the situation will improve in the future. This suggests that we are witnessing a kind of sanctions-induced consumer frustration.
It is plausible that there is a more obvious cause behind this caution observed among Russian consumers: citizens are not answering honestly, but instead keep both the war and sanctions in mind and thus answer in line with the official position of the Russian authorities and exhibit ‘economic positivity’. Therefore, they cannot rule out the possibility of unforeseen events happening sometime in the future, similar to the announcement of ‘partial mobilisation’ in the autumn.