The Bank of Russia's Inflation Challenge

Abstract

Since the early 2000s, inflation in Russia has never fallen below 6%, except for brief intervals following the major crisis of 2008 and the changes in 2012 to the seasonal indexation of administered prices.

Persistently high inflation expectations have posed a challenge to the Bank of Russia in setting its 4% inflation targeting course. A further complication was the drop in oil prices and the precipitous weakening of the rouble seen between 2014 and 2015. These factors called for a balanced approach to monetary policy based on the tracking of changes to relative CPI prices and a rigorous assessment of the secondround effects of the exchange rate pass-through (ERPT) on prices.

The central bank has accordingly increased its focus on analytics for underlying inflation and alternative indicators for secondary price shock effects. The following components now constitute the basis for understanding inflation developments in Russia: first, companies’ and consumers’ perceptions of (or sentiments about) oil price dynamics, the exchange rate and aggregate demand; second, an in-depth study of second-round price effects; third, competent communication on the part of the Bank of Russia on the trajectory towards the 4% target in the medium term; and, finally, concerted policy efforts by both monetary and fiscal authorities.

Full Publication: Inflation Mechanisms, Expectations and Monetary Policy

Keywords: Central banks, inflation

JEL Classification: E58, E31