While Fed in denial, Hawkish Bank of Russia views inflation as “not transient,” warns of possible rate hike, shock and fear

US inflation is almost as hot as in Russia, but the Fed continues to explode it.

By Wolf Richter for WOLF STREET.

Consumer price inflation in Russia is skyrocketing, jumping 6.0% in May from a year ago, 2 percentage points above the Bank’s 4.0% target from Russia. Polls in Russia show that food inflation is a major concern, currently at 7.4%.

But inflation in the United States is not far behind: the consumer price index (CPI) jumped 5.0% in May. Yet central banks are on opposite tracks in their approach to inflation.

Federal Reserve Governors keep huffing and puffing that this searing inflation is “temporary” or “transient” and will likely go away on its own despite the government’s massive stimulus and policy measures. Huge and continuous monetary stimulus from the Fed, although some doubts settle among a few. So they’ll keep interest rates close to zero until at least next year, and they’re still buying $ 120 billion a month in securities to lower long-term interest rates.

Russia has followed the opposite course, “surprising” economists every step of the way. This trajectory began on March 19 with a 25 basis point rate hike, to 4.5%, against the expectations of 27 of 28 economists polled by Reuters, who did not expect a rate hike. On April 23, the Bank of Russia raised its key rate by 50 basis points to 5.0%. On June 11, it rose another 50 basis points to 5.5%. The next political meeting is scheduled for July 23.

Is a rise in shock and fear rates next? Bank of Russia Governor Elvira Nabiullina is preparing the markets for this eventuality – so it won’t be a shock, but just a wonder.

At the July meeting, the central bank will “consider” increasing the range from “25 basis points to 1 percentage point,” she said. Bloomberg Television in an interview.

“We find that inflation remains high” and that “inflation expectations are quite high,” she said. The initial factors behind this surge in inflation were the weakening of the ruble last year and the rise in commodity and food prices. On their own, they might not require monetary policy intervention, she said.

But now inflation expectations remain high, creating second-round effects, she said.

“This is why we find that the acceleration in inflation is not transient, as in many other countries, but more persistent,” she said. “That’s why we think we should act with rate hikes.”

“We reported to the markets [at the last meeting] that further increases in policy rates may be needed to curb inflation, and we now see that they are warranted, ”she said.

The economy recovered fairly quickly, she said. The growth in demand has exceeded that of supply. And that gap creates additional inflationary pressures and, combined with high inflation expectations, forces us to neutralize our monetary policy, she said.

“Now the policy is still accommodating, if we compare the key rate [5.5%] with the current inflation rate [6.0%] and with inflation expectations, ”she said.

This is the school of thought that negative real interest rates – interest rates below the rate of inflation – are accommodating or stimulating for the economy. According to this theory for the United States, a neutral monetary policy would be with the Fed’s key rates of at least 3.4% if based on the core PCE and at 5.0% if based on the CPI.

Nabiullina said the magnitude of the rate hikes and the path will depend a lot on incoming data “because there are a lot of uncertainties now.”

The Bank of Russia wants to “prevent the accumulation of inflationary risks”, but it also wants the movements to be “predictable” for the markets, because unexpected sharp increases in rates can create adjustment difficulties for the markets, a- she declared.

Hence the interview with Bloomberg TV. It is clearly trying to prepare the markets for a sharp rate hike in July, perhaps a Brazilian-style 75 basis point hike or even a shocking percentage point, while the Fed will continue to hang on to its move. doctrine of when this scorching inflation in the United States is only transitory and will dissipate on its own.

There are entire generations who have never experienced this type of inflation, this type of destruction of the purchasing power of the dollar. Lily… Fed’s lowest Core PCE inflation gauge increased the most since 1983

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