02.02 Review

Victory over Inflation: The surge of New Year optimism among Russians conceals a deterioration in assessments of their material situation caused by the increase of prices at the end of 2023

January data on consumer sentiment in Russia demonstrates extreme economic optimism, but this is predominantly a seasonal effect: in January, assessments often 'jump' by about 7 points. While during the past two years of the war, Russians' assessments of the economic situation have demonstrated stable inadequacy — they appeared overstated — the short-term trend for the second half and the end of 2023 was somewhat negative. Assessments of the economic situation deteriorated after the growth of the indicator in the first half of the year, influenced by the acceleration of inflation, which became a manifestation of economic overheating in the second half of the year. However, the New Year surge of optimism could be supported by a slowdown in inflation and the perception of this by the population: according to respondents' estimates, both observed and expected inflation slightly decreased in January. Nevertheless, it is too early to talk about a stable trend. Respondents demonstrate a high propensity to spend rather than to save their disposable income, and this model of consumer behaviour is pro-inflationary and indicates that Russian residents do not yet believe in the trend towards lower inflation. Three factors had a divergent impact on assessments of the current financial situation and consumer sentiments during the second half of 2023: the growth of wages due to the difficult situation in the labour market, the acceleration of inflation and the strengthening of the ruble. By the end of the year, the inflation factor became predominant. This was reflected in a decrease in the share of respondents who consider themselves to be in the high-income group and in a slight increase in the low-income group. In the January data, this effect was even more pronounced than in the assessments at the end of 2023.

In January, Russian consumer sentiments matched the record of May 2014, reaching 108 points, according to the latest InFOM survey. However, the January surge of optimism is partly a seasonal phenomenon: if the overall trend in economic sentiment is favourable or neutral, surveys usually record a January increase in the index of about 7 percentage points. This happened in January 2017, 2018, 2021 and 2022. In January 2021, the index jumped from 83 to 90 points, and in January 2022, from 85 to 90. Paradoxically, there was some growth in the consumer sentiment index in the middle of 2022. In January 2023, it jumped from 95 to 101 points and fluctuated around this value until December.

The same seasonal nature applies to the surge of optimism among those surveyed by inFOM regarding the country's development prospects: in January, this indicator jumped to 125 points from 117 in December. However, it should be noted that during the two years of the war (with the exception of February-March 2022), Russians' assessments of the prospects for the Russian economy have consistently improved: in January 2022, before the invasion of Ukraine, the index was 98 points, in December 2022 it was 103, and in January 2023 it reached 114. This can be seen as a manifestation of the 'rally around the flag' effect — a kind of euphoria associated with the fact that the effect of the war and sanctions turned out to be lower than expected, and Russian media and official comments exclusively emphasise the positive aspects of the Russian economy.

With regard to assessments of personal financial situation, it should be noted that there was a slight deterioration at the end of 2023. Thus, the proportion of those stating this in the third quarter averaged 28%, after 27% in the first quarter and 25% in the second and third. In January, this proportion dropped to 24%, but it is too early to say whether this is a significant change or a result of the aforementioned New Year optimism surge. In favour of the former assumption, however, is the fact that estimates of observed and expected inflation stabilised in January for the first time since August 2023. The estimate of observed annual inflation fell from 17% to 16.3% and expected inflation fell from 14.2% to 12.7%. Compared to December, the proportion of those expecting a very strong price increase in the coming month significantly decreased from 31% to 16%. 

However, speaking of a significant reduction in inflation expectations, in our opinion, is also premature, considering the seasonal factor of New Year optimism. In October, the value of observed inflation was 13.9%, while expected inflation was 11.2%, and the figures are still not close to these. The persistence of high inflation expectations is also indicated by the 'norm of large purchases': 31% of respondents said that it is better to invest disposable income in large purchases, while 52% preferred a strategy of accumulation (at the beginning of 2023, when there was a low inflationary background, this ratio was 27% compared to 56%). The Central Bank considers this level of consumer sentiment to be a strong pro-inflationary factor: anticipating further price increases, consumers are more inclined to buy goods at already elevated prices, and sellers respond by raising them further.

However, there is another explanation for the growing propensity of consumers to make large purchases — the transformation of Russian retail. In 2022 and 2023, consumers may have limited their consumption due to the fact that many familiar brands disappeared from the market and new brands were unfamiliar and expensive. A recent study by NielsenIQ states that this problem has largely been resolved. It persisted longest in non-food goods (household appliances, clothing, footwear, etc.) and the children's goods. It was partly solved by parallel imports, and partly by the emergence of new brands, including Russian brands. Almost 30% of consumers purposefully choose Russian products, which now compete mainly with Asian products, particularly those from China, NielsenIQ notes. Consumers have adapted to the new product lines and are making purchases of durable goods that had been postponed during the transition period. 

According to the Central Bank's report on the state of the banking sector, the high key rate has slightly cooled consumer lending, but the volume of loans issued remains high. In December, it decreased by almost 2% compared to November, however, this decrease was mainly due to 'loans worth 250 billion rubles being repackaged into bonds (securitisation)', notes the MMI Telegram channel. Excluding this transaction, the dynamics were roughly zero. At the same time, the issuance of car loans accelerated: +3.4% compared to December against +3.2% in November. Mortgage lending due to the continuation of preferential programmes grew by 2.9% compared to the previous month.

Three factors had divergent effects on assessments of the current financial situation and consumer sentiments throughout the second half of 2023: wage growth due to the difficult labour market situation, the acceleration of inflation and the strengthening of the ruble. In the conditions of high demand for labour, businesses were forced to raise wages all last year. In January-October, Rosstat estimated the growth of real (i.e. adjusted for inflation) wages at 7.7%. However, at the end of the year, the growth of nominal wages was offset by a corresponding increase in inflation, while the willingness of businesses to raise wages further was under pressure from rising costs (including due to the rise in import prices). Moreover, the strengthening of the ruble somewhat stabilised the situation with consumer import prices. As a result, the consumer sentiment index stagnated (103 in July and 102 in December), and assessments of personal financial situation worsened in the last quarter of the year. 

According to the InFOM survey, inflation was the main factor affecting the economic self-perception of respondents at the end of the year. In the first quarter of 2023, 17% of those surveyed classified their households as belonging to the high-income group (those who can afford to buy real estate plus those who can afford to buy a car), while 31% of respondents classified their households as being low-income ('there is only enough money for food' plus 'there is not enough money even for food'). From the second to the fourth quarter of 2023, the first group increased to 19% and the second group decreased to 28%. In January 2024, only 15% of respondents classified themselves in the high-income group and 31% put themselves in the low-income group, which appears worse than the distribution at the beginning of 2023. In addition to inflation, these assessments were likely influenced by rising loan costs.