The ruble will weaken, inflation will rise
At a recent meeting of the Russian Government, an updated economic forecast for the near future was presented. More precisely, these were the scenario conditions and the main parameters of the forecast for the next three years — a document that, so to speak, precedes the official forecast for 2025 and for the planning period 2026–2027. Updated data for the current year 2024 were also considered.
If you look at the list of at least the main indicators from the scenario conditions, then in the overwhelming majority these indicators are not very interesting (and not even entirely understandable) to many. Well, really, we hear that the gross domestic product will grow by so many percent… So what? No, it’s clear to everyone, of course, that if GDP grows, it’s good, if it falls, it’s bad. What's next? It’s not very clear.
Or this: investments in fixed assets will increase, industrial production will increase… Even if wages increase on average across the country? What exactly will change for me personally? This is what really worries and interests people.
If you analyze, then among the main forecast indicators there are still two or three that are more or less understandable to a wide range of people.
Traditionally, this is the US dollar exchange rate, which is measured in rubles. Yes, yes, the exchange rate, the exchange rate of the national currency (ruble) in our country is still assessed in relation to the dollar in the main indicators of the socio-economic development forecast. Many people have become accustomed to this over the past decades, so people are familiar with it. So, the average annual dollar exchange rate should be 94.7 rubles per dollar in 2024. Let me note that according to the official forecast in the fall (2023), the exchange rate should have been 90.1 rubles per dollar this year. This means that today it is planned that the ruble will weaken significantly faster compared to how it was imagined at the end of 2023.
Here it is also necessary to pay attention to the fact that we are talking about the average annual dollar exchange rate. This means that if in the first months of 2024 it was significantly lower than 94.7 rubles per dollar, then in the second half of the year it should be noticeably higher. So 94.7 rubles per dollar is not by the end of the year: by this time, with such an average annual forecast, it should be closer to 100 rubles per US dollar.
To be honest, the forecast for the dollar exchange rate was somewhat surprising. But what is important here is that the Ministry of Economic Development believes that the weakening trend of the ruble will continue in the future: in 2025, the average annual exchange rate of the US dollar should be 98.6 rubles per dollar, in 2026 — 101.2 rubles per dollar.
The answer to the question of why the ruble is predicted to weaken can be found directly in the scenario conditions. It is predicted that in 2024 the trade balance, that is, the excess of exports of goods and services over their imports, will decrease to $104.5 billion (in 2023 the figure was $120.9 billion). Here it is, the basic basis of what is happening with the ruble — the deterioration of the trade balance. I note that the Bank of Russia constantly pays attention to this basis. So we've sorted out the ruble — it will weaken.
What about the prices? It is clear that the most popular answer will be: prices will rise. This won't surprise anyone. However, I would like to know the answer to this question more precisely. Answer from the Russian Ministry of Economic Development: inflation in 2024 will be 5.1%. This is a modest assessment, you will agree. But even it is higher than previously predicted — 4.5%.
Prices are generally a very painful topic for everyone, so let’s dwell on it in more detail. In fact, the inflation forecast of 5.1% by the end of 2024 seems very, very optimistic.
In the first four months of 2024, accumulated inflation has already amounted to about 2.5%, that is, half of the projected annual inflation has already been “scooped out.” And there are still two thirds of the year ahead. In addition, it is clear that in December, as happens every year, there will be a price surge. But it’s not even December that we have to worry about. July is a very worrying month for inflation.
The scenario conditions stipulate that from July 1, 2024, the total payment of citizens for utilities should immediately increase by 9.8%. Let me remind you that in 2023 utility bills were not indexed at all. Nevertheless, inflation at the end of 2023 amounted to 7.4%. And here is such a serious increase in utility services, and inflation at the end of the year, as predicted, will be much lower. Theoretically, of course, this is possible, but practically…
By the way, the increase in the total payment of citizens for utilities from July 1, 2024 by 9.8% is the national average. In some regions, indexation will, presumably, be higher.
Let’s also not forget that utility bills are perhaps the most “sensitive” costs, but there are other regulated prices (tariffs) for products (services) of infrastructure sector companies. Thus, from July 1, 2024, wholesale gas prices for the population should be indexed by 11.2%, and electricity tariffs for the population by 8.9%.
But in 2024 they do not promise to increase tariffs for passenger transportation by rail in the regulated sector (general and reserved seat carriages). These railway rates were increased twice in 2023, so they decided to skip 2024. And that’s good… And yet, despite the non-indexation of railway tariffs in the regulated sector, it is clear that July 2024 will be a very inflation-intensive month.
The official inflation forecast for 2024 turned out to be “why- then» over-optimistic. I will give my explanation of where this optimism comes from.
This is what is called “verbal interventions”, that is, with the help of words — official forecast estimates — they are trying to orient consumers and product manufacturers to the fact that prices will not rise very quickly. In this way, the authorities hope to create low inflation expectations in the country.
Well, such an approach is possible. However, it must be borne in mind that if consumers of this forecast information consider that it is not very reliable, then no inflation expectations will decrease. Therefore, forecasts through verbal interventions are, of course, an opportunity to reduce inflation expectations, but this opportunity must be used very, very carefully.
The promise to reach 4 percent inflation in 2025–2027 is also very optimistic if we expect that positive economic growth rates during this period will be based primarily on domestic consumer demand.
And one more thing about One forecast indicator must be mentioned that worries people — about the real disposable income of the population.
In 2024, real incomes (that is, taking into account inflation) should grow by 5.2%. Thus, it is by these percentages that income growth should outpace price growth. If this actually happens, then inflation is not scary either.
However, how it will actually be, we’ll wait and see. The main risks for the Russian economy are still seen not in 2024, but in the future, when the budget impulse, as provided for by the law on the federal budget for the next three years, begins to weaken. And then what is provided today not by the basic (main) forecast, but by its so-called conservative version, can become much closer to reality.