Cheaper `Herring Under Fur Coat' Doesn't Convince Russians

(Bloomberg) -- Elvira Nabiullina says Russians will get to enjoy some lower prices in time for New Year’s Eve parties, but her countrymen aren’t buying it.

The central bank has compiled special holiday-staple price indexes to press the point that inflation is in fact coming down, according to the governor. 

The cost of “Herring Under Fur Coat,” a Russian classic of fish stacked with potatoes, beets and a heavy coat of mayonnaise, is actually down 0.9 percent this year. “Olivier Salad,” a pseudo-French concoction, costs only 1.2 percent more than last year. Overall inflation is running at 2.6 percent from a year earlier, Nabiullina said.

“People’s sense of inflation is far higher,” Nabiullina told lawmakers in Moscow on Wednesday.

For reasons that are frustrating the central bank, price growth as perceived by Russians is almost four times the headline number. That’s leaving monetary policy hostage to elevated expectations, which the Bank of Russia calls a “pillar” of its interest-rate decisions. Until those expectations stabilize at a lower level, Nabiullina needs to tread cautiously about lowering interest rates, even if business bemoans the high cost of credit.

Despite more than halving inflation since the end of 2016, the central bank has delivered less than 2 percentage points of easing this year. 

Rate cuts will continue, but “fairly gradually,” which in the absence of unfavorable outside factors will bring the benchmark from its current level of 8.25 percent to 6 percent to 7 percent in one or two years, according to Nabiullina. At the same time, she warned on Wednesday against moving too quickly to reach an “equilibrium level” for rates.

Household inflation expectations for a year ahead are now at 8.7 percent, she said. The central bank targets inflation at “near or around” 4 percent.

‘Very Sticky’

“Inflation expectations are very sticky,” said Vladimir Miklashevsky, senior economist at Danske Bank A/S in Helsinki.

Inflation in excess of 2,000 percent in the 1990s may still be on Russians’ minds, calling into question the recent price deceleration. Despite the unprecedented slowdown, Russians still ranked inflation among their three top concerns last quarter, alongside corruption and unemployment, according to Sberbank CIB’s latest survey of the typical shopper. 

The central bank has also said that deeper inequality complicates the task of asserting control over prices because the less-well-off are more sensitive to rising costs and contribute greatly to inflation expectations.

The financial squeeze on some people is growing tighter, according to a report published by the Higher School of Economics. The share of Russians who say their household finances are “bad” or “very bad” rose to 23 percent in September, while about 8 percent of respondents said they lack enough money even to buy food, the poll showed.

“There’s a historical bias,” said Dmitry Polevoy, an economist at ING Groep NV in Moscow. “People simply never lived under low inflation, which is why more time is needed for them to adapt.”

To contact the reporters on this story: Olga Tanas in Moscow at otanas@bloomberg.net, Anna Andrianova in Moscow at aandrianova@bloomberg.net.

To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net, Paul Abelsky

©2017 Bloomberg L.P.