Sergey Drobyshevsky: “Strengthening volatility of the ruble exchange rate and oil prices affect Russians' inflation expectations”

“I believe that the likely factors for increasing households' inflation expectations amid slowing growth rates of the officially registered consumer price index could be the increased volatility of the ruble exchange rate and oil prices in April 2025, as well as rapid growth of prices for certain categories of groceries (e.g., potatoes), which is projected by households on the dynamics of the overall inflation index. Inflation expectations are highly subjective, and respondents always react more actively to rapid price growth of certain items, while failing to notice stable or slow price growth for a wider range of goods.

In May, we observe strengthening of the ruble exchange rate, and, in addition, seasonal factors affecting food prices will start to gradually take effect, and, I think, inflation expectations may become more moderate.

The difference in the expectations of those having savings or without them can be explained by the fact that savings currently maintain high interest rates, and people subjectively believe that they are more protected from inflation and feeling the price hikes less acutely, since their level of well-being is supported by interest income. Furthermore, since these individuals are more affluent, daily consumption goods have a smaller share in their shopping basket, thus price increases are not perceived as high.

Inflation expectations for the CBR are a certain indicator of trust in its policy, and, accordingly, it cares equally about the expectations of both households and businesses. However, constant overestimation of inflation expectations compared to statistical indicators is a global practice; the CBR takes such a shift into account, and it is not the absolute level of expected inflation that is important, but rather the change in inflation expectations over a period of 3–6 months.

However, since the weekly consumer price index in April-May already shows a slowdown in relation to previous months, and the peak of inflation, according to our estimates, has passed in April, a reduction in the key rate by 0.5–1 p.p. can be expected at the June meeting of the Bank of Russia, and by the end of the year the key rate may be lowered to 16.5% if inflation slows down to 5.5–6% in annual terms,” — said Sergey Drobyshevsky.