Russia’s old political bogeyman — inflation — is making a come back. A weak harvest and drought has sparked the highest August inflation since year 2000.
Though inflation tends to be low or even negative in August, consumer prices this August rose by 0.6 per cent (m/m), triggered by drought, the poor harvest,(5) and the government’s ban on grain exports. A comparable rate has not been seen in August since 2000. As a result, twelve-month rolling inflation grew by 6.1 per cent in August, compared to 5.5 per cent in July.
The Russian government’s inflation forecasts, despite being higher than before, look far loo low:
The Ministry of Economic Development has already raised its forecast for inflation this year from 5.5–6 per cent to 7–7.5 per cent. This forecast would require monthly inflation of 0.4–0.5 per cent until year-end, however, and is likely to be exceeded, given that inflation tends to accelerate in the fall.
The nation actually looks set for nearly 10% inflation, with rising global food prices to blame. It’s a key threat for Russian politicians given that high inflation leads to an angry public:
Projected annual consumer price inflation of 8.5–9 per cent, with a significant chance of double-digit inflation in the first half of next year, is more realistic. Because food products hold a relatively high share of the Russian consumer’s basket—38 per cent in 2010—rising world prices for basic food products will very quickly and strongly affect Russian CPI. For example, when the world price of wheat jumped 2–3 times in 2007, food inflation in Russia rose by more than 21 per cent, while non-food inflation was 7–8 per cent.
If inflation rises above 10 per cent next year, Russian authorities will have to make a tough choice between meeting the announced deficit targets and addressing growing public discontent by increasing pension and wage indexation. Even today, close to 40 per cent of the public regards high inflation as the government’s biggest failure. The parliamentary elections in December 2011 and the presidential election in March 2012 will only increase the pressure.
As we mentioned a couple weeks ago, global food prices are soaring. Here it seems to be spilling over into general Russian CPI data, exacerbated by Russia’s recent agricultural woes. But which nation will be next?