Russian CPI Components

Unlike oil revenues, capital inflows have a different impact on the Russian economy for the simple reason that they are not absorbed by the Stabilization Fund (and thus effectively sterilised). Consequently they serve to drive additional money expansion and exert upward pressure on the ruble. Given the limited monetary instruments available to the Russian authorities for sterilization (the bond market, eg, is very underdeveloped) and the current stance of monetary policy (which attempts to limit the pace of nominal exchange appreciation), reducing inflationary pressures is becoming an exceedingly difficult task.

And if we look for a moment at the components in Russia inflation (see charts below) we will find two old friends out there in the forefront - food and construction. In fact in the first 10 months of 2007 the rate of increase in construction costs was some 15% (as compared to only 9% during the equivalent period of 2006). Food price increases are evidently a global phenomenon, but the structural basis for these increases is nonetheless important. Global growth at the present time is being driven by very rapid increases in living standards in the newly developing economies (and especially in the so-called BRICs). Now one of the stylized characteristics of these economies is that the population in general tends to be comparatively poor, and as a result food consumption tends to constitute a largish share in the consumption basket (see chart for Russian CPI weightings below, in China and Turkey, and by way of comparison, food related products constitute around 25% of the CPI basket).