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Borscht Eaters Hit by Russian Inflation Worse Than It Looks

It’s a simple recipe that could cook up a volatile stew for the Russian central bank.

A cold spell this spring helped run up prices for the hearty ingredients needed to make borscht, considered comfort food in Russia and much of eastern Europe. The cost of beets, potatoes, onions and carrots went up by 20 to 30 percent in May from the previous month, while cabbage became 40 percent more expensive. The headline index of consumer prices rose a monthly 0.4 percent in May.

The recent increases in what Citigroup Inc. calls the “Borscht Collection” of staples disproportionately affect worse-off Russians and can translate into higher inflation expectations, which the central bank has described as a “pillar” of its rate decisions. The Bank of Russia will opt for a more cautious cut of 25 basis points in its 9.25 percent benchmark at a meeting on Friday, according to most economists surveyed by Bloomberg.

“The importance of these cheap vegetables is higher for households that are poorer,” said Sergey Narkevich, an economist at Moscow-based Promsvyazbank PJSC. “As a rule, headline inflation reacts rather seriously to price hikes in this segment.”

The wealth divide in the world’s most unequal major economy is a liability for policy makers because the disappearance of middle-income households that are the most sensitive to interest rates and prices weakens the central bank’s ability to manage inflation. That also helps explain why price growth as experienced by consumers is almost triple the headline number.

Follow our TOPLive blog on Russia’s central bank decision on June 16

As incomes collapsed at a pace unprecedented under President Vladimir Putin during Russia’s longest recession this century, close to two-thirds of people earn less than the average monthly income.

“Real incomes of Russians have declined in the past several years,” Putin said during his annual call-in show on Thursday. “It’s particularly alarming that the number of people living below the poverty line -- getting incomes below that level -- has increased.”

As a result of the seasonal pickup in prices of fruit and vegetables, a slowdown in Russian inflation stalled for the first time in almost a year in May. The annual index remained at 4.1 percent for a second month, dashing expectations that inflation could fall below the central bank’s target of 4 percent already in May. Food accounts for almost 40 percent of the consumer-price basket.

The outlook was even less favorable for those especially sensitive to changes in the cost of essential goods. Most Russians put perceived inflation at 12.1 percent in May, and see it slowing only to 10.3 percent a year ahead.

“These staple food-price increases may influence consumer inflation expectations, and through this purchasing decisions,” Citigroup analysts Barry Ehrlich and Richard Schellbach said in a research note.

Both the Bank of Russia and the Economy Ministry attributed the higher prices to the unusually cold weather in April and May, which may have damaged some crops and meant they won’t mature as quickly as usual.

Another reason for the faster inflation in fruit and vegetables can be a “compensation effect” after gains in the ruble, a bumper harvest and policies by retailers pushed down their costs at the start of the year, according to Raiffeisenbank.

Besides inflation expectations, the central bank makes its decisions based on factors including the situation in the economy and unemployment, according to Governor Elvira Nabiullina, who’s said policy makers will consider reductions of 25 and 50 basis points this Friday. Rates have already been cut at the last two meetings by a cumulative 75 basis points.

While risks for food prices “will inform” the central bank’s decision, they won’t be decisive in its decision, according to VTB Capital economists including Alexander Isakov. 

“Price growth in vegetables is psychologically noticeable for the population one way or another, and it may affect the trend of slowing inflation expectations,” said Nikolay Kondrashov, an analyst at the Development Center of the Higher School of Economics. “But the impact of this factor will be limited in terms of scale and time.”

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