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Russia Goes to War With Inflation

Summary:
While the Federal Reserve continues to downplay inflation in the US, insisting that it is “transitory,” the Bank of Russia has gone to war with rising prices. Bank of Russia Governor Elvira Nabiullina says she sees “persistent factors” to inflation, and on Friday, the Russian Central bank hiked interest rates by 100 basis points to 6.5%.In a statement, the Bank of Russia said, “The contribution of persistent factors to inflation increased due to faster growth of demand compared to output expansion capacity.”The word “transitory” was nowhere to be found in the Bank of Russia statement.Taking into account high inflation expectations, this has significantly shifted the balance of risks towards pro-inflationary ones and may cause inflation to deviate upwards from the target for a longer

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While the Federal Reserve continues to downplay inflation in the US, insisting that it is “transitory,” the Bank of Russia has gone to war with rising prices. Bank of Russia Governor Elvira Nabiullina says she sees “persistent factors” to inflation, and on Friday, the Russian Central bank hiked interest rates by 100 basis points to 6.5%.

In a statement, the Bank of Russia said, “The contribution of persistent factors to inflation increased due to faster growth of demand compared to output expansion capacity.”

The word “transitory” was nowhere to be found in the Bank of Russia statement.

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

The Bank of Russia listed numerous causes of the inflationary pressure. summarized them in bullet point form.

  • “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 labor 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.”

The Bank of Russia began responding to rising prices in March with a surprise 25-basis point hike from 4.25 to 4.5%. It then followed up with a half-a-percent rate hike in April and another 0.5% hike in June.

The Bank of Russia statement said tightening monetary policy is necessary because in the current economic context, “businesses find it easier to transfer higher costs to prices.”

Businesses have been raising prices in the United States as well. For instance, Chipotle hiked menu prices last month after increasing wages the month before. As a Fox News report noted, “Companies from Target, Costco, McDonald’s to theme parks such as Disney World have taken similar steps to bump employee pay.”

Peter Schiff has said he thinks we could see even bigger CPI numbers in the last six months of the year as reluctant businesses begin to pass on their costs to consumers. Economist Mohamed El-Erian made a similar prediction. During a  interview, El-Erian emphatically said, “Inflation is not going to be transitory.”

I have a whole list of companies that have announced price increases, that have told us they expect further price increases, and that they expect them to stick.”

Russia’s inflation rate came in at 6.5% in June. Interestingly, the Russian central bank has a higher tolerance for inflation than the Fed. The Bank of Russia’s target is 4% inflation. According to the central bank’s forecast, annual inflation will reach 5.7-6.2% in 2021. The bank hopes its monetary policy tightening will push inflation back down to 4%.

In the US, June CPI was up 5.4%. We’ve already seen a 3.6% increase in CPI over the last six months. If the last half of the year simply duplicates the first, Americans are looking at an annual pace of 7.2%.

In other words, US inflation looks a whole lot like Russian inflation. The only difference is that Jerome Powell keeps saying “transitory” over and over while the Russians have gone to war against inflation.

The Bank of Russia threw a little shade toward the Fed and the European Central bank, noting, “Given that the global economic recovery is progressing at faster paces than previously expected and the need is no longer in place for unprecedentedly accommodative policies in advanced economies, an earlier monetary policy normalization in these countries is possible.”

But is it really possible?

With its rate hike, the Bank of Russia put interest rates in line with inflation, meaning the real interest rate is still at zero. The bank noted, “monetary conditions remain accommodative given elevated inflation expectations and actual inflation.”

In order to bring real interest rates to zero in the US, the Federal Reserve would need to hike interest rates to over 5%.  Meanwhile, the Fed is talking about maybe raising rates 25 or 50 basis points in two years. The fact is interest rates at 5% or 6% would collapse this debt-riddled economy. That’s exactly why Jerome Powell has bet the farm on “transitory” inflation. His only hope is that it goes away on its own. But as Peter Schiff has pointed out, the inflation fire isn’t just going to go away. In fact, the Fed is throwing gasoline on the fire.

We have huge pieces of legislation on deck for the government to spend trillions and trillions of dollars that it has no intention of collecting in taxes and is completely relying on the Federal Reserve to print all the money, which means the inflation fire that Powell claims is going to go out by itself because it’s all transitory is about to get much, much bigger because he’s throwing all this gasoline on it.”

The Bank of Russia’s response to inflation is telling. It further reveals the holes in Powell’s transitory narrative. It also reveals the impossibility of the Fed actually confronting the problem.

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