Annual inflation was reported last week to be running at up to 8.5 percent in December, its highest level for three years. It shows no sign of slowing despite the Central Bank raising interest rates seven times last year. Central Bank head Elvira Nabiullina said recently that inflation was likely to start falling in early 2022.

Central Bank analysts identified several reasons for high inflation:

• Unemployment in Russia is at a record low (4.3 percent of the ‘economically active’ population), which increases strain on the labor market.
• Growth rates for lending — particularly consumer borrowing — remain high.
• Tariffs, salaries and pensions that are linked to the previous year’s inflation rate could trigger an inflationary spiral.
• Geopolitical tensions are driving up costs for commodities, especially oil, and the value of the Russian currency is falling.
• The spread of the Omicron variant brings a risk of production line disruption due to staff sickness.

In addition, much of the economic growth in Russia last year (GDP is expected to rise by as much as 5 percent) has been driven by credit. This contributes to increased demand — often this demand outstrips production capacity, leading to higher prices.

Why the world should care: With inflation showing no sign of slowing and Russia in the grips of an Omicron wave, the Central Bank is likely to increase interest rates further.