Page 62 - RusRPTSept22

4.2.1 CPI dynamics
Deflation takes hold in Russia. After runaway inflation this spring, the Russian economy is lurching toward the opposite extreme. For the second month running, the country has recorded deflation. Prices are falling due to a strong ruble and a sharp decline in demand: Russians are apparently anxious about another crisis and are starting to save. For the economy, falling prices are an alarming sign. However, economists do not believe that Russia is heading for a deflationary spiral.
Russia’s state statistics service on Thursday published July figures, which showed national deflation for a second month in a row. Prices fell by 0.39% (in June, it was 0.3%). Few economists doubt that deflation will continue into August. Unlike July and June, August often sees falling prices due to cheap fruit and vegetables during the harvest season.
However, three successive months of deflation is an unprecedented and very abrupt change. In March, inflation hit a 20-year high: in monthly terms, prices were up 7.6%. In annual terms, inflation in April was running at 17.8%.
The reasons for this sudden change are well-known. First and foremost, it’s driven by a fall in demand caused by the economic slowdown (Russian GDP fell 4% in the second quarter) and the rapid (up to 20%) increase in interest rates since the start of the war. The second reason is the abrupt strengthening of the ruble (which doubled in value against the U.S. dollar from March through June). Today, the U.S. dollar is worth 20% less in ruble terms than in January. As a result, imported goods have become cheaper. A simple example: despite Apple’s official departure from Russia and all the additional costs involved with setting up new import channels, iPhones in Russia cost almost exactly what they did last fall (83,000 rubles for an iPhone 13 128GB today compared with 80,000 rubles in October 2021).
Economic Development Minister Maxim Reshetnikov has warned of the danger of Russia’s economy slipping into a “deflationary spiral.” This is a well-known economic phenomenon that means, if deflation drags on, producers lose money due to lower prices and demand. That prompts them to reduce investment and cut staff, leading to a rise in unemployment and a further fall in demand, triggering a spiral that can take years to escape. However, the Central Bank categorically denies the possibility of this happening, referencing macroeconomic indicators including money supply.
According to the Federal State Statistics Service, monthly deflation in Russia in July accelerated to 0.39% from 0.35% in June, and inflation in annual terms (compared to July last year) slowed to 15.1%.
Deflation in July turned out to be fruit and vegetable again, this product fell in price by 11.5% over the month. Food products fell in general by 1.5%, non-food products by 0.4%, services by 1.4%.
In the traditionally deflationary August, this trend has not yet dried up: in the week by August 8, deflation amounted to 0.08% after 0.14% in the previous one, and 0.1% since the beginning of the month. Rosstat registered a
62 RUSSIA Country Report September 2022 www.intellinews.com