Russia's fight against inflation is becoming more difficult

The Russian economy cooled off in the first quarter of 2026 largely as policymakers had expected. For the Central Bank, however, the situation is not getting any easier. This is because new pressures from the external economic environment are adding to the ongoing domestic price pressures.

In its latest “Talking Trends” bulletin, the Russian Central Bank explains that the weaker momentum at the start of the year was partly due to purchases brought forward at the end of 2025. Businesses and households had adjusted to tax changes and brought forward their purchases. At the same time, according to the central bank, the data for February suggest that the weaker demand at the start of the year was likely only temporary. The slowdown would therefore be more of a short-term effect than a sign of a fundamental cooling.

This is precisely what makes the monetary policy situation complicated. On the one hand, the economy is losing momentum; on the other, inflation remains stubbornly high. The central bank noted that annual inflation remained virtually unchanged at 5.9 percent in March. At the same time, underlying price dynamics remained high in February and March. The goal of bringing current price growth down to an annualized four percent has not yet been achieved.

For the financial markets, this means one thing above all: interest rate cuts are likely to be cautious and take place in small steps. Investors had already anticipated further easing, which influenced trading in March and early April. However, at the same time, yields on longer-term Russian government bonds rose, while the yield curve flattened overall. This signals that uncertainty about the future course of monetary policy remains high.

High wages, high demand, high prices

The central bank continues to monitor the domestic market particularly closely. According to its data, real wages rose significantly faster than labor productivity again in January. While this boosts private consumption, it also increases the risk that inflationary pressures will persist longer than desired.

This is precisely one of the central problems of Russian monetary policy. As long as incomes grow faster than economic output, demand remains robust. And as long as demand remains robust, it becomes more difficult for the central bank to sustainably reduce inflationary pressure.

This is a classic dilemma: what stabilizes consumption and growth in the short term simultaneously hinders the return to lower inflation.

External economic risks are exacerbating the situation

In addition, the external economic environment has deteriorated. The central bank points out that the escalating situation in the Middle East has caused prices for Russian export goods to rise. At first glance, this may seem like a relief, as higher export revenues support the ruble and can thus have a price-dampening effect.

However, this effect is not clear-cut. The central bank also warns of higher domestic prices for export-oriented goods, rising import costs, more expensive logistics, and new strains in supply chains. All of this could have the opposite effect and even intensify domestic inflationary pressures.

According to the central bank’s assessment, the impact of these opposing forces depends heavily on how long tensions in the Gulf region persist and how lasting the effects of transport or production disruptions will be. While many of the current shocks are of a temporary or one-off nature, the central bank must nevertheless closely monitor whether they result in lasting effects on consumer prices.