May Sees Another Increase in Russian Inflation

In May, inflation in Russia accelerated once again as officials cautioned that substantial public spending to support the military operation in Ukraine was causing the economy to overheat. While the increase in government expenditure has helped sustain Russia’s economy amidst a wave of Western sanctions, it has also led to soaring prices and labor shortages in various sectors unrelated to the conflict.

According to Russia’s statistics agency Rosstat, inflation was at 8.3% on an annual basis in May, marking the highest rate since February 2023. This was a significant increase from the 7.8% rate recorded at the end of April, and well above the country’s official 4.0% inflation target. The rapid price hikes have prompted calls for the Central Bank of Russia to raise interest rates further to curb inflation.

Despite holding its key interest rate at 16% last week, the Central Bank suggested that it may increase borrowing costs in the future if inflation continues to rise at a rapid pace. German Gref, the CEO of state-owned Sberbank, voiced concerns about the fragility of Russia’s economic growth, noting that it was largely dependent on government spending to drive up wages and consumer spending, rather than on investment or improvements in productivity.