Why Inflation in Russia Matters Globally

When prices start to rise in a country's economy, it creates a ripple effect affecting both individual households and international corporations. Russia, possessing the eleventh largest economy in the world with significant influence over global energy and commodity markets, faces an especially complicated inflationary situation in 2025.

Understanding the causes and mechanisms of inflation in Russia is not merely an academic exercise. It impacts global energy resource prices, the energy security of the world community, and strategic decisions made by international corporations. When the price of a barrel of oil carries a Russian premium due to supply concerns, it affects gas stations from London to Singapore.

Definition and Measurement of Inflation

Inflation in Simple Terms

Inflation is the process where prices of goods and services in an economy rise and your money loses purchasing power. If inflation is 6.6%, it means that what cost 100 rubles a year ago now costs approximately 106.6 rubles.

For example: in November 2024, a liter of milk cost 90 rubles, and by November 2025, it was around 97 rubles. It's not just milk that has increased in price; nearly all goods and services have risen simultaneously.

Economists distinguish between "good" and "bad" inflation. Moderate inflation of 2-3% per year is generally considered healthy for the economy, as it motivates individuals and companies to invest their money rather than just hoarding it, which in turn fosters business creation and job growth. However, when inflation exceeds 6-7%, it starts to significantly harm real income levels and complicates long-term planning, especially for retirees living on fixed incomes and businesses that cannot adjust prices quickly.

How Inflation is Measured in Russia

Official inflation measurements in Russia are conducted by the Federal State Statistics Service — Rosstat. They calculate inflation using the so-called Consumer Price Index, which tracks price changes for a basket of goods and services typically purchased by a Russian family.

This consumer basket includes food products (bread, milk, meat, vegetables, oil), non-food goods (clothing, household items, medicine), and services (housing, utilities, transport, healthcare, education). It's important to understand that the basket is weighted according to real spending by households. About 38% of a typical family's expenses go toward food, 30% on non-food goods, and 32% on services.

The structure of the basket is critical. If bread rises by 10% and clothing by 2%, overall inflation will be somewhere in between but closer to 10% because bread is purchased much more frequently. This explains why people feel inflation acutely — they notice rising food prices every time they go to the grocery store.

Three Ways to Measure Inflation

The first method is to look at month-on-month prices: in November 2025, prices increased by 0.42% over the month. This is a modest increase, but it accumulates throughout the year. The second method is to examine how much prices have risen since the beginning of the year: as of November, prices had risen by 5.26% over eleven months. The third method is to compare prices with the same period last year: the reported 6.6% shows how much more expensive goods are in November 2025 compared to November 2024.

Core vs. Total Inflation

There is also a distinction between core inflation and total inflation. Core inflation excludes the most volatile categories — food and fuel. In November, core inflation was 6.12%, slightly below the total inflation rate of 6.6%. This suggests that the price increases are mainly linked to temporary factors in the food and fuel sectors rather than entrenched inflation within the economy.

Why Inflation in Russia Remains Elevated

To understand why prices are rising, it is necessary to study both monetary factors (the amount of money circulating in the economy) and real factors (production costs, supply constraints, external shocks).

Excess Money in the Economy

The fundamental factor driving Russian inflation in 2025 is the expansion of the money supply. The M2 money aggregate, which includes cash and deposits in banks, has increased by approximately 20.1% year-on-year. In contrast, nominal GDP is growing only by 7-10%. This indicates that there is significantly more money circulating in the economy than the growth in the production of goods and services. When there is more money but not more goods, prices rise—this is basic economics.

Where Did All This Excess Money Come From?

Firstly, from government spending on military needs. Defense spending reached around 6% of GDP in 2025. This is a massive amount — tens of trillions of rubles annually. When the government spends this money, it ends up in the pockets of defense contractors, military personnel, and workers in the defense industry, who then promptly spend it on food, clothing, housing. This creates an initial impulse of increased demand. At the same time, the production of civilian goods does not grow proportionally—resources are redirected towards defense production for obvious reasons.

Secondly, the government has been distributing loans at subsidized rates to various sectors of the economy. Approximately one-sixth of all new loans were issued at state-subsidized rates, significantly below market levels. When a company can obtain a loan cheaply, it takes it and spends it rapidly on expanding production, hiring workers, purchasing equipment. All of this increases demand and puts upward pressure on prices.

Thirdly, at the beginning of the 2024-2025 period, although the Central Bank raised rates, it did not reduce the money supply as aggressively as inflation required. This was a policy mistake: the interest rate can be raised, but if the money supply is not curtailed, the effect will be limited. Only by the end of 2025 did the monetary policy truly tighten.

Real Causes: Rising Production Costs

Behind the simple act of printing money are real factors contributing to price increases — the rising costs of everything needed for the production of goods. Wages are rising rapidly because the labor market in Russia is very tight. Companies are competing with one another for workers and are forced to raise wages by 6-8% per year. But this creates a dilemma: as wages rise, people have more money and spend it—demand increases even more, prices rise further, companies demand even higher wages. This creates a spiral that is difficult to escape from.

Fuel and Energy: A Critical Situation

Fuel and energy prices have surged dramatically. From the beginning of 2025 to October, the price of motor fuel skyrocketed by 116%, and diesel by 70%. The reason is attacks on Russian oil refineries. When fuel rises dramatically, it impacts everything. The cost of delivering goods to the store becomes more expensive. Heating apartments costs more. Electricity costs more, as part of it is produced in thermal power plants that burn oil and gas. Contractors transporting building materials pay more for fuel and charge more for delivery. This wave is then reflected in prices across the board.

Weakening Ruble and Imported Inflation

The situation with the ruble is also complex. The national currency weakened sharply multiple times throughout the year for various reasons. When the ruble weakens against the dollar or the euro, imported goods become more expensive. For example, if a product used to cost 100 dollars with an exchange rate of 100 rubles per dollar (totaling 10,000 rubles), then at an exchange rate of 110 rubles per dollar, that same product will cost 11,000 rubles.

Russia actively imports machinery, electronics, medicines, chemicals, and equipment. All these have become more expensive due to the weakening of the ruble. Estimates assert that currency fluctuations account for 30-50% of inflation in Russia depending on the period. Specific examples illustrate the scale of the problem: a smartphone that cost 30,000 rubles at an exchange rate of 1:100 now costs 33,000 rubles at an exchange rate of 1:110. Cars imported through official channels have increased in price by 15-25%. Western-made medicines have become accessible only to wealthier Russians.

Insufficient Supply of Goods

Additionally, there is simply a lack of supply of goods. Fruits and vegetables rose unusually quickly in price during the summer and fall of 2025. This is a temporary factor—a seasonal fluctuation—but it has added about 0.5-1 percentage point to overall inflation. In some manufacturing sectors, companies are operating at full capacity and cannot physically increase output, so they respond by raising prices.

Which Goods Are Seeing the Largest Price Increases

Inflation is not just an abstract number of 6.6%. It is distributed extremely unevenly across the economy. Some goods rise 2%, while others rise 15%. This is crucial because families do not consume the average basket of goods — they buy what they need.

Food Products: The Most Pressing Concern

For Russian families, food prices are the primary concern. If wages have risen by 5%, but bread, milk, and meat have increased by 8-10%, the family's real income decreases. In November 2025, food prices increased by 7.5% year-on-year, down from 9.3% in October, but still exceeding the overall inflation level.

Bread and cereal products saw price hikes of 10-12%. The reasons are complex: concerns about harvests, logistical costs, and government price support. Dairy products — butter, milk, cottage cheese, cheese — increased by 8-10%, driven by rising feed costs for livestock and delivery services. Poultry meat and beef rose by 6-8%, constrained by herd sizes and feed prices. Vegetables and fruits represent the most volatile category. In the fall of 2025, fresh vegetables rose by 15-20% month-on-month, an unusually intense surge.

Why Food Price Increases Are So Painful

Why is this so painful? Because for low-income families, food constitutes 50% of all expenses. If you earn 30,000 rubles a month and spend 15,000 on food, and food prices rise by 7.5%, it means that you now need to spend around 16,125 rubles on food. You can no longer achieve the same quality of life. A family of three that previously bought three kilograms of beef each month can now only afford two kilograms. Consumption volume decreases, and life becomes less dignified.

Utilities: Annual Shock in July

Every July in Russia, there is an annual indexation of tariffs for housing and utility services. This is government policy — utility companies raise rates once a year. In the summer of 2025, this indexation was particularly painful: housing and utility services (electricity, gas, heating, water supply, garbage collection) overall increased by 11-12%.

This has a clear impact. If a person pays 4,000 rubles a month for rent and utilities, after the July indexation that bill may rise by 450-550 rubles. That may not be much for wealthier individuals, but for a family that earns 50,000 rubles, it's 1% of their monthly budget. And there are millions of such families. The increase in utility expenses hits hardest on the elderly, who cannot move to cheaper housing and are forced to pay rising bills.

The Mechanism of Tariff Increases

Water supply, electricity, gas, and building management companies have raised prices because their own costs have increased, including fuel for thermal power stations, maintenance equipment, and worker wages. All these have become more expensive simultaneously.

Non-Food Products: Relative Stabilization

Interestingly, non-food products (clothing, furniture, cars, medicines) have seen more modest increases — around 3.5% in November. Car prices surged at the beginning of the year but then stabilized. Medicine prices increased less compared to other categories — by only 0.3% — as the government attempts to control prices in this sector. Clothing and textiles, despite rising raw material costs, have increased moderately, by about 2-3%.

This indicates that producers in these sectors are more aggressively cutting profits or costs to avoid losing customers. Retailers selling clothing, furniture, and electronics know that if they raise prices too much, people will simply stop buying.

The Central Bank's Response and Key Rate

In the face of rising inflation, the Central Bank of Russia undertook a dramatic attempt to tighten monetary policy — the most aggressive in the last decade.

How the Key Rate Works

The Central Bank's key interest rate is the rate at which commercial banks borrow money from the Central Bank. When the Central Bank raises this rate, loans become more expensive for everyone: businesses, consumers, and other banks.

Imagine a simple logic. In January 2024, the rate was 7.5%, and a company could take a loan for production expansion at a rate of approximately 9-10%. Such a rate was worth investing at. By June 2025, the rate had risen to 21%, bringing loan costs for companies to 22-23%. With that cost of capital, most projects become unprofitable. If you have a project that generates a return of 15% per annum, you won't finance it with a loan costing 22%. The result: companies simply stop investing.

History of Rate Hikes in 2024-2025

The history unfolded as follows. In January 2024, when inflation accelerated, the rate was at 7.5%. The Central Bank quickly recognized the need to act. In March, it was raised to 16%, in September to 19%, and by June 2025, it peaked at 21%. Afterward, as inflation began to decrease more slowly, in October, the rate was first lowered to 16.5%.

The Cost of This Fight

The effect was powerful but painful. By the third quarter of 2025, economic growth fell to 0.6% year-on-year. Business investments plummeted by 15-20%. Unemployment began to rise. Consumers, seeing high-interest rates, began to spend more cautiously. They canceled restaurant orders, postponed vacations, and cut back on entertainment.

The result concerning inflation was clear — it began to decrease. From 9.5% at the beginning of the year to 6.6% by November. This is significant progress. However, the price was high: nearly zero economic growth, rising unemployment, and declining real incomes. This reflects the classic trade-off between inflation and unemployment discussed by economists.

Why the Rate Works Slowly

However, economic reality is much more complicated than theory. Yes, high-interest rates reduce inflation, but with considerable lag. A business that has already started a new project at the beginning of the year doesn't just stop it because the rate increased in March. They will complete the project, spend the money, hire people, and pay wages. Those wages enter the economy for several more months.

Furthermore, the government itself was handing out cheap loans to businesses, partially neutralizing the effect of the high rate. Lastly, inflation expectations also complicate the issue. If people expect 12.6% inflation, then even a 16.5% rate in real terms amounts to merely 3.9%.

How Inflation Affects the Lives of Ordinary People

Behind the inflation figures lies tangible pain: people work longer to buy the same goods, retirees eat worse, and young families postpone having children.

Real Incomes Decline Despite Wage Increases

Nominal wages in Russia rose by approximately 5% in 2025. It sounds good. However, inflation was averaging 7-8%. This means that real incomes — the amount of goods and services a person can buy — have actually declined by 2-3%. People earn more money, but can buy less.

This creates a strange and painful feeling. A person sees that their salary has increased, celebrates this, and then realizes that life has not become easier — and may even have gotten more difficult. People are more carefully tracking their finances, budgeting more tightly, and postponing purchases.

Pensioners Are Losing More

Pensioners living on fixed incomes are the primary victims of inflation. If a pensioner received 20,000 rubles a month in November 2024, they would need 21,400 rubles in November 2025 to maintain their previous standard of living. However, pensions are indexed once a year, usually in April or May, and the rate of indexing often lags behind the rate of inflation. The outcome: the real incomes of pensioners decline.

Savings held in rubles lose purchasing power. If you have 1 million rubles in cash and inflation is at 6.6%, you are losing 66,000 rubles per year. Pensioners often adopt the strategy of "capital erosion," meaning they spend their savings faster than they had planned.

Households Cut Back on Spending

When prices rise and the future is uncertain, people change their behavior. Orders in restaurants have fallen. People are traveling less. They are going less often to movies and theaters. Spending on entertainment, clothing, and books has diminished. They focus on essentials: food, housing, and utilities.

This shift in consumer demand from peripheral goods to essentials illustrates how deeply inflation alters life. Visits to the theater, buying a book, enjoying a nice dinner at a restaurant — all become luxuries that people can no longer afford.

Inequality Increases

Inflation exacerbates inequality. Poor families, who spend 50% of their income on food, suffer from 7-8% increases in food prices far more than wealthier families, who spend about 15% of their income on food. The wealthy can shield themselves: they buy properties (protection against inflation), hold dollars, and invest in businesses. The poor cannot — they keep their money in cash, which loses value.

How Businesses and Industries Are Coping with Inflation

If inflation is a source of pain and loss for households, for companies it is a puzzle of how to survive.

Profits Contract Like Never Before

Imagine a retail store that sells clothing. Its suppliers have raised their prices by 8%. It wants a markup of 40%, as before, but customers say: I won’t pay more, it's cheaper at a competitor. The result: the store has to raise prices by 6%, while the supplier increased by 8%. The margin is compressed.

Manufacturing companies are facing the same problem, but even more acutely. A factory producing plastic containers sees raw materials rise by 10%, workers’ wages rise by 7%, electricity costs increase monthly, and logistics become 15% more expensive. Most companies opt for a middle ground: raise prices by 6-7% but simultaneously cut costs elsewhere.

Companies Cut Back on Investments

When the loan rate jumped to 20%, many companies simply froze their investment plans. The result is a plunge in investments. In Russia, business investments fell by approximately 20% in 2025 compared to what could have been expected. This means that factories are aging, equipment physically wears out and is not replaced. This will reduce productivity in the long term.

Three Ways to Survive

Companies have utilized three primary survival strategies. The first is frequent, small price increases. Instead of one large increase of 10%, a company raises prices by 1% each month. People notice such price inflation less. The second strategy is to reduce quality. The product packaging might be slightly smaller or thinner in material, but the price remains nearly the same. The third strategy is cost-cutting: companies are slashing marketing budgets, freezing hiring, and avoiding upgrades.

The result of all three strategies is the same: consumers lose, quality of life in society gradually degrades, but companies survive.

Future Projections and Possible Changes

Will inflation continue to decrease? Or will it stabilize at the current level? Or might it accelerate again?

Central Bank's Forecast and Assumptions

The Central Bank projects the following figures: inflation for 2025 will be 6.5-7% (almost achieved), in 2026 4-5%, and full return to the target of 4% will not occur until 2027. This indicates that the path to normalization will take an additional two years.

These forecasts are based on several key assumptions. Firstly, they assume that the government will increase VAT from 20% to 22% in 2026. Secondly, the forecast assumes that wages will grow more slowly — only by 3-4% per year, rather than the current 6-8%. If this does not happen, inflation will be higher.

Thirdly, the assumption that public expectations will return to normal is crucial. As long as people expect inflation of 12.6%, they demand higher wages, spend money more quickly, and accelerate inflation themselves. If the Central Bank can convince people that inflation will be 4%, they will behave differently.

What Could Go Wrong

Economists highlight several risks. Firstly, the risk of inflation increasing: new shocks to infrastructure could sharply raise fuel prices by 50-100% in a few months.

Secondly, there is the risk of a wage-price spiral: if unions or individual workers refuse to accept 3-4% increases and demand 6-8%, inflation will be higher than forecasts.

Thirdly, a deterioration in the geopolitical situation could spark panic and cause a sharp weakening of the ruble, which would again raise import prices. On the other hand, there are also downside risks. If investments fall so drastically that demand plummets below expectations, inflation could decrease more rapidly.

How to Protect Yourself from Inflation

The forecast may not come to fruition, so individuals have a motive to protect themselves from inflation personally.

For Workers and Employees

The simplest strategy is to demand a raise above the inflation rate. If inflation is 6.6%, one should demand an increase of at least 7-8%. But there's a problem: an employer may argue that their income has also dropped, and they can’t afford to pay that much.

The second strategy is to improve one's skills and move to a job with a higher salary. A programmer who learns a new programming language can switch companies and potentially earn 20% more.

The third strategy is indexation in contracts. It is essential to ensure that the employment contract stipulates that wages will rise alongside the consumer price index. The fourth strategy is diversifying income: not relying on just one salary, but also earning income from renting out properties or selling products online.

For Pensioners and Savers

Pensioners cannot demand raises, so they need alternative strategies. The first is to hold money not in rubles but in foreign currency. Dollars or euros tend to retain their value better than rubles.

The second strategy is real estate. Apartments and homes typically appreciate with inflation. A pensioner who has a rental apartment earns an income protected against inflation.

The third strategy involves bank deposits with high-interest rates. If a bank offers 12-14% on a deposit and inflation is 6.6%, then the real return on the deposit is 5-7%.

The fourth strategy includes federal loan bonds (OFZ) and corporate bonds. The fifth strategy involves physical assets. Gold, silver, and jewelry usually increase in value in line with inflation and serve as a safeguard.

For Investors

For those with money to invest, there are several paths. High-yielding companies' stocks (dividend stocks) provide protection against inflation. If a company earns more due to rising prices, its dividends also increase.

Real estate is a classic hedge against inflation worldwide. Rental commercial property generates income and protection.

Commodity futures and exchange-traded funds (ETFs) on oil, gold, and metals are bets on rising commodity prices, which typically correlate with inflation. If inflation reaches 10%, and the price of gold increases by 15%, the investor is protected.