(Bloomberg) — As Russians have turned to panic-buying in the wake of President Vladimir Putin’s invasion of Ukraine, one item remains in plentiful supply — official reassurances that everything is under control.
The government has rushed out near-daily declarations that essential staples remain plentiful in an economy blindsided by war and sweeping international sanctions.
Food? Nothing to worry about, said Agriculture Minister Dmitry Patrushev. There’s an abundance of diapers and sanitary pads, according to the Industry and Trade Ministry. No deficit of fever-reducing drugs either. As for flour, St. Petersburg has enough.
But the word isn’t getting through.
With price pressures already building before the war and global supply chains under strain, Russians are now contending with the new reality of economic isolation by hoarding more than common doomsday shopping favorites.
Bags of sugar from major companies have been out of stock on some websites, replaced by no-name brands selling at three times the price. Sanitary towels, diapers, pet food and coffee capsules are among other goods in high demand, with local items produced by international companies or with imported materials growing especially scarce.
Russia is on track for one of the deepest recessions in its modern history after the ruble crashed and commerce seized up as foreign suppliers of everything from food to cars limit or stop doing business in the country. Although officials acted quickly to head off a bank run and restore some calm in financial markets with capital controls and an emergency interest-rate hike, they have no quick fix for the consumer frenzy.
A March 15-22 survey found that a quarter of Russians stocked up for the future in recent days, largely by buying non-perishables like pasta and household chemicals.
Weekly numbers compiled by Russia’s biggest lender, Sberbank, show consumer spending has been increasing at an annual pace of as much as 25% this month, compared with single-digit increases before the invasion.
“It will take a very long time for the Russian economy to adapt to the situation,” Ksenia Mishankina, a research analyst with Loomis, Sayles & Co., said in an email. “Despite the government’s efforts over the years aimed at weaning Russia off a reliance on imported medicines, the impact has been limited.”
At stake is the ability of Russia’s economy to muddle through as Putin’s military offensive in Ukraine enters its second month. Before the war, the country counted on consumer spending for more than half of all economic activity.
Authorities have set margin limits for essential goods and Russian retailers including X5 Retail Group restricted purchases of “socially important” food items earlier this month following reports of hoarding.
Still, inflation has shown little sign of letting up. Some economists forecast it may reach as high as 25%, a level not seen in Russia since the government’s 1998 debt default.
In a flashback to the Soviet era, the panic buying has emptied shelves, increasingly putting supply under pressure. One online seller said the cost of office paper has risen as much as five times since last month.
Medicine prices are meanwhile rising up to 40%, according to Russia’s health watchdog. Russian doctors see shortages of more than 80 drugs including Nurofen for children, according to a survey.
What Our Economists Say:
“The sanctions shock to supply is pushing up prices much faster than we’d expect from the plunge in the ruble. The initial burst might be driven by outright shortages as well as panic buying, but inflation could accelerate for months as the disruption ripples through supply chains.”
Other niches of the market are easier to replenish, a reflection of a changing trade landscape as Putin redraws alliances. Russia’s safety watchdog allowed to resume shipments of some fruits from five countries, including China on March 5.
Hygiene products are another case in point, after Always sanitary pads producer Procter & Gamble reduced its business in Russia. It’s hardly making every consumer happy.
“Shop shelves are now full of sanitary napkins from brands I don’t know with names in Chinese characters, sometimes at double the price that Always or Libresse were just weeks ago,” said Larisa, a 46-year-old housewife in Lipetsk south of Moscow.
©2022 Bloomberg L.P.
US inflation and consumer spending cooled in December – Al Jazeera English
The Federal Reserve’s preferred inflation gauge eased further in December, and consumer spending fell – the latest evidence that the Fed’s series of interest rate rises are slowing the economy.
Friday’s report from the US Department of Commerce showed that prices rose 5 percent last month from a year earlier, down from a 5.5 percent year-over-year increase in November. It was the third straight drop.
Consumer spending fell 0.2 percent from November to December and was revised lower to show a drop of 0.1 percent from October to November. Last year’s holiday sales were sluggish for many retailers, and the overall spending figures for the final two months of 2022 were the weakest in two years.
The pullback in consumer spending will likely be welcomed by Fed officials, who are seeking to cool the economy by making lending increasingly expensive. A slower pace of spending could boost their confidence that inflation is steadily easing. Still, the decline in year-over-year inflation matched the Fed’s outlook and is not likely to alter expectations that it will raise its key rate by a quarter-point next week.
On a monthly basis, inflation ticked up just 0.1 percent from November to December for a second straight month. Energy prices plunged 5.1 percent, and the overall cost of goods also fell.
“Core” prices, which exclude volatile food and energy costs, rose 0.3 percent from November to December and 4.4 percent from a year earlier. The year-over-year figure was down from 4.7 percent in November, though still well above the Fed’s 2 percent target.
Falling prices for oil, gas, copper, lumber, wheat and other commodities, along with the unclogging of supply chains, have helped slow the retail costs of cars, furniture and clothes, among other items.
Price increases, though, have remained persistently high for some goods and services, including eggs, which skyrocketed 60 percent last month compared with a year ago. Egg prices rose 11.1 percent just in December, inflated by an outbreak of avian flu that has led to a culling of herds and higher feed costs.
Car rental prices have also soared nearly 27 percent from a year ago and rose 1.6 percent just in December.
But for many other items, inflation is easing. Coffee prices, though up nearly 14 percent in the past year, rose just 0.2 percent last month. And the cost of clothes and shoes rose just 3 percent in the past year and 0.3 percent last month.
Friday’s figures are separate from the better-known inflation data that comes from the consumer price index. The CPI, which was released earlier this month, has also shown a steady deceleration.
“The latest data offer the first tangible signs that the economy’s main engine is slowing,” said Oren Klachkin, lead US economist at Oxford Economics, referring to consumers, whose spending accounts for about 70 percent of economic activity.
The Fed has been seeking to slow spending, growth and the surging prices that have bedevilled the nation for nearly two years. Its key rate, which affects many consumer and business loans, is now in a range of 4.25 percent to 4.5 percent, up from near zero last March. Though inflation has been decelerating, most economists said they think the Fed’s harsh medicine will tip the economy into a recession sometime this year.
“We continue to see the US economy experiencing a mild recession this year,” said Lydia Boussour, senior economist at EY Parthenon.
Low levels of unemployment
A recession typically causes widespread layoffs and higher unemployment. But for now, US employers are adding workers, and the unemployment rate remains at a half-century low of 3.5 percent.
Should job losses, which are occurring at many finance and tech companies, drive up unemployment, a recession could eventually be declared by a group of economists at the National Bureau of Economic Research, a nonprofit that officially determines when recessions occur. The economists at the NBER typically make such an announcement well after a recession has actually begun.
For now, the number of people seeking unemployment benefits – a proxy for layoffs – declined last week to 186,000, a very low level historically. And Walmart, the nation’s largest employer, said it would raise its minimum wage, from $12 to $14 an hour, to help it keep and attract workers.
The Fed is in an increasingly delicate position. Chairman Jerome Powell has emphasised that the central bank planned to keep boosting its key rate and to keep it elevated, potentially until the end of the year. Yet that policy may become untenable if a sharp recession takes hold.
On Thursday, the government reported that the economy grew at a healthy clip in the final three months of last year but with much of the expansion driven by one-time factors: Companies restocked their depleted inventories as supply chain snarls unravelled, and the nation’s trade deficit shrank.
By contrast, consumer spending in the October-December quarter as a whole weakened from the previous quarter, and business investment dropped off sharply. Overall, the economy expanded at a 2.9 percent annual rate in the October-December quarter, down slightly from a 3.2 percent pace in the previous quarter.
If consumers remain less willing to boost their spending, companies’ profit margins will shrink, and many may cut expenses. That trend could lead eventually to waves of layoffs. Economists at Bank of America have forecast that the economy will grow slightly in the first three months of this year – but then shrink in the following three quarters.
More frugal consumers would threaten to send the economy into a recession. But they can also help reduce inflation. Companies cannot keep raising prices if Americans will not pay the higher prices.
Last week, the Federal Reserve’s beige book, a gathering of anecdotal reports from businesses around the country, said, “Many retailers noted increased difficulty in passing through cost increases, suggesting greater price sensitivity on the part of consumers.”
Your Weekend Reading: Nobody Knows Where the US Economy Will Land – Bloomberg
The US Economy Slows Down
The Federal Reserve must be pleased with the top-line numbers in Thursday’s fourth-quarter GDP report, which showed the U.S. economy grew by a solid 2.9% while its preferred price index slowed to 3.2%. But drill down, and the economy looks to be losing momentum.
Maybe the best news from the report is that consumer spending continued to increase at a steady 2.1% and contributed about half of the GDP growth. It appears that rising interest rates haven’t yet caused consumers to pull back, though the December retail sales report showed a sharp drop in spending and could augur a slowdown.
The shift in spending toward services that began as lockdowns eased continued. Services contributed 1.16% to the consumption increase, with motor vehicle and parts chipping in 0.20%. End-of-year discounts may have moved forward purchases, and auto analysts are forecasting weak growth this year.
Businesses also restocked inventories as supply chains eased, which accounted for 1.46% of the GDP growth. Net exports also added 0.56%. But neither is likely to be sustained going forward. The other big lift to GDP came from government spending, which increased 3.7% and contributed 0.64%. Most of this was transfer payments and salaries rather than defense or public works.
The biggest cause for concern was the 6.7% fall in fixed private investment. Much of that was housing (-26.7%), owing to the sharp increase in interest rates. What the Fed giveth, it now taketh away. Capital expenditures also fell 3.7%, which signals that businesses are getting nervous and spending less on equipment that can boost worker productivity.
Intellectual property investment is holding up better, but research and development declined last quarter. One culprit may be last year’s expiration of the immediate expensing for R&D. The pullback in business investment amid higher interest rates and economic uncertainty has been evident in the ISM purchasing managers index for some time.
The economy can’t live on consumption alone, and the sharp decline in the savings rate—2.9% in the fourth quarter compared to 7.3% a year earlier—suggests that consumers may be running up credit cards to make ends meet or take the vacation they couldn’t during the pandemic. But as savings decline, so may consumer spending.
Perhaps the best news for the Fed is that real disposable personal income grew 3.3% as the personal consumption expenditure price index eased to 3.2%, down from 4.3% in the third quarter and 7.5% in the first. This suggests that its monetary medicine may be starting to work, and it might not have to raise interest rates as high as some expected a few months ago.
Recent job and unemployment claim reports also indicate that the labor market is holding up well, even as many large companies announce layoffs. Small businesses are still hiring, and China’s abandonment of zero-Covid policies will help global growth.
The biggest risks to the U.S. economy other than higher interest rates this year are probably the tax increases in the Inflation Reduction Act and a regulatory onslaught that are compounding business uncertainty. President Biden has a growing economy, and let’s hope he can keep it.
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