Russia's fight against inflation becomes more difficult

The Russian economy cooled down in the first quarter of 2026, largely in line with the expectations of policymakers. However, the situation is not getting any easier for the central bank. This is because the ongoing domestic price pressure is being compounded by new burdens from the external economic environment. In its latest "Talking Trends" bulletin, the Russian central bank explains that the weaker momentum at the start of the year is partly due to purchases being brought forward to the end of 2025. Companies and private households had adjusted to tax changes and brought forward purchases. At the same time, according to the central bank, the data for February indicates that the weaker demand at the start of the year was probably only temporary. The slowdown would therefore be more of a short-term effect than an expression of a fundamental slowdown. This is precisely what complicates the monetary policy situation. On the one hand, the economy is slowing down, while on the other, inflation remains stubbornly high. The central bank noted that annual inflation remained virtually unchanged at 5.9% in March. At the same time, underlying price momentum remained high in February and March. The target of reducing current price growth to an annualized four percent has not yet been achieved. For the financial markets, this means one thing above all: interest rate cuts are likely to be made cautiously and in small steps. Investors had already expected further easing, which influenced trading in March and early April. At the same time, however, yields on longer-dated Russian government bonds rose, while the yield curve flattened overall. This signals that uncertainty about the future course of monetary policy remains high. High wages, high demand, high prices The central bank continues to keep a particularly close eye on the domestic market. According to its figures, real wages once again rose significantly faster than labor productivity in January. Although this strengthens private consumption, it also increases the risk that the upward price trend will last longer than desired. This is precisely one of the central problems of Russian monetary policy. As long as incomes grow faster than economic output, demand will remain robust. And as long as demand remains robust, the central bank will find it more difficult to sustainably reduce inflationary pressure. This is a classic dilemma: what has a stabilizing effect on consumption and growth in the short term also makes it more difficult to return to lower inflation. Foreign trade risks exacerbate the picture The foreign trade environment has also deteriorated. The central bank points out that the aggravated situation in the Middle East has caused the prices of Russian export goods to rise. At first glance, this can have a relieving effect, as higher export revenues support the rouble and can therefore have a price-dampening effect. However, this effect is not clear-cut. At the same time, the central bank is warning of higher domestic prices for export-oriented goods, rising import costs, more expensive logistics and new burdens in the supply chains. All of this could have the opposite effect and even increase domestic inflationary pressure. According to the central bank, the impact of these opposing forces depends heavily on how long the tensions in the Gulf region last and how long transportation or production disruptions last. Many of the current shocks are of a temporary or one-off nature. Nevertheless, the central bank will have to keep a close eye on whether they have a lasting effect on consumer prices. The article Russia's fight against inflation is becoming more difficult appeared first on ostwirtschaft.de.