While Fed Blows Off Inflation, Hawkish Bank of Russia Shocks & Awes with Rate Hikes, Sees “Persistent” & “Prolonged” Inflation


by Wolf Richter, Wolf Street:

But the US and Russia have similar red-hot inflation rates.

In Russia, the official rate of inflation was 6.5% in June. In the US, the official rate of inflation as measured by CPI was 5.4% in June. The CPI-W, which is used for the cost-of-living-adjustments to Social Security payments, was 6.1%. You see, there is barely any difference in inflation between Russia and the US.

The Bank of Russia sees the “persistent factors” to inflation, and it has therefore been cracking down on inflation. The Fed has decided to be in official denial about the persistent factors, is brushing them off as “temporary,” and is letting inflation rip.

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Today’s rate hike would have been shock and awe if Bank of Russia Governor Elvira Nabiullina hadn’t warned on June 28 of a possible shock-and-awe hike of up to 1 percentage point. Today the Bank of Russia followed through: it hiked its policy rate by 1 percentage point to 6.5% (from 5.5% previously).

The rate-hike trajectory kicked off on March 19 with a surprise 25-basis-point rate hike, from 4.25% to 4.5%, followed on April 23 by a 50-basis-points hike to 5.0%, followed on June 11, by another 50-basis points to 5.5%. Followed by today’s 100-basis-point hike to 6.5%.

In today’s announcement, the reason for the mega-rate hike was right at the top: “The contribution of persistent factors to inflation increased due to faster growth of demand compared to output expansion capacity.”

This “persistent” is up a notch from the “not transitory” that Nabiullina had used on June 28.

There was no mention of “transitory” or “temporary.” None. But instead, there was “for a longer period” and “prolonged.”

“Taking into account high inflation expectations, this has significantly shifted the balance of risks towards proinflationary ones and may cause inflation to deviate upwards from the target for a longer period,” it said.

And the Bank of Russia put further rate hikes on the table over the next meetings to tamp down on inflation.

In the current context, “businesses find it easier to transfer higher costs to prices,” the Bank of Russia said.

The context is the same in the US, with businesses finding it easy to raise prices, and doing it, and price increases are now spiraling through the economy. But the Fed is in official denial.

The Bank of Russia cited inflation expectations by households that “continue to grow” and by businesses that “remain near their multi-year highs.” Same in the US of A.

“The dominating influence of proinflationary factors could lead to a more substantial and prolonged deviation of inflation upwards from the target,” the Bank of Russia said. That’s what the Fed should have been saying for months.

And it said that the effect of the proinflationary risks “may be strengthened by elevated inflation expectations and corresponding secondary effects.”

Despite the rate hikes to 6.5%, monetary conditions “remain accommodative” it said, given high and rising inflation and inflation expectations. The 1-percentage point hike today to 6.5% pulled the policy rate to the same level as inflation, and the real interest rate went from -1% before today to 0%. “In this context, lending continues to grow at rates close to recent years’ highs,” it said.

And the purchasing power of savers matters and gets a mention: “Today’s decision of the Bank of Russia will speed up the adjustment of bank interest rates to the monetary policy pursued. This will make it possible to raise the attractiveness of bank deposits for households, protect the purchasing power of savings, and ensure balanced lending expansion.”

A Fed intern should accidentally copy and paste that last sentence into the next FOMC statement so that the holders of US bonds and savings products get at least an accidental mention before the Fed guts them and sacrifices them at the altar of inflation.

The Bank of Russia then lists various causes of the inflationary pressures, including:

  • “A stronger-than-expected decline in households’ propensity to save, propelled by the combination of low interest rates and growing prices.
  • The “remaining disruptions in production and supply chains.
  • “Structural changes in the labour market as a result of the pandemic.
  • “Price movements in global commodity markets,” though they “have somewhat declined as prices for certain goods started to go down in June and July.”
  • “Further movements of food prices will largely depend on agricultural harvest in 2021 both in Russia and abroad.”

And it has a gem about central banks in “advanced economies” – possibly pointing at the Fed and the ECB which have both decided to let inflation rip. Given the pace of the global economic recovery, “the need is no longer in place for unprecedentedly accommodative policies in advanced economies.”

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