Evgeniy Goryunov, Head of the Monetary Policy Department at the Gaidar Institute in a comment for RBC, explained why one-off price spikes in Russia can have a long-term impact on inflation and why it is important for the Central Bank to take this effect into account.
Central banks typically do not raise interest rates in response to temporary price increases. The fact is that interest rate decisions do not affect inflation immediately. Therefore, while such a decision may not help curb a short-term price spike, it could slow down the economy. This approach works when some temporary factors drive up inflation while others, conversely, hold it in check. Over time, their effects balance each other out.
In Russia, according to Evgeny Goryunov, the situation is different: one-off events almost always lead to price increases. Their effects accumulate, and over time, inflation drifts further and further away from the target set by the Central Bank. Therefore, the economist believes that after such spikes, the Central Bank should maintain a high key rate for a longer period.
“There is no good solution to this problem, but perhaps the best option is to change the approach to inflation targeting so that, following one-off price spikes, the Central Bank maintains higher rates for a longer period. The drawback of such a solution is that a high rate will hold back the economy more severely and for longer,” explained Evgeny Goryunov.