Stagflation is coming
Economic agencies are raising their inflation forecasts and lowering their growth forecasts. Experts are increasingly uttering the word "stagflation." However, Vladimir Putin explained that the war is still the priority. What will this lead to?
Author: Tatyana Rybakova
This is a scary word.
Stagflation Stagflation is "a situation in which economic decline and depression (stagnation and rising unemployment) are combined with rising prices—inflation." The word itself is a combination of "stagnation" and "inflation," and is attributed to British politician and Chancellor of the Exchequer in the early 1970s, Iain Macleod. At the time, a similar combination of economic factors was being experienced by the United States, Great Britain, and many other countries. However, stagflation is still alive today: Argentina, Venezuela, and Turkey have all experienced it in one form or another.
It was possible to defeat it only by harsh measures.
In the US, the then head of the Federal Reserve Paul Walker He raised the interest rate to 20,5% with inflation at around 15%. The inflationary spiral, where rising prices trigger further price increases, was successfully contained, but President Jimmy Carter's career was ruined—he was not re-elected.
In Argentina, current President Javier Miley has opted not for a rate hike (at the time of his election, it was already at 133%, with inflation over 211%), but for shock therapy: radical cuts to budget expenditures, the state apparatus, benefits, and so on. Today, Argentina is a model of effective economic policy, but the presidential election in Argentina is not until December 2027.
In Turkey, President Recep Tayyip Erdoğan attempted to combat the looming stagflation in the country with measures some economists in Russia are proposing—lowering the interest rate to revive the economy. As a result, Turkey nearly fell into a systemic crisis, and Erdoğan was forced to back down: the interest rate was raised, inflation is gradually declining, and GDP is growing.
In Venezuela, stagflation, which began in 2013, under the “skillful” management of Maduro, escalated into an economic collapse accompanied by hyperinflation in 2018.
Western countries were able to overcome the stagflation that emerged more or less smoothly after COVID-19 with less stringent measures—though it's premature to talk about a complete overcoming of this: the sharply increased US debt, the economic stagnation of Europe, and Southeast Asia teetering on the brink of crisis—all of this is not only an echo of the Russian-Ukrainian war and the war in the Strait of Hormuz, but also the price paid for the measures taken during COVID-19.
It is therefore not surprising that experts, on the one hand, are wary of voicing such a diagnosis for the economy, while on the other, they are closely examining the indicators: is stagflation heading our way?
Is stagflation here with us?
When it comes to Russia, the answer is both yes and no. Let's look at the numbers.
Ministry of Economic Development The government has sharply raised its inflation forecast for this year: from 5,2% to 6,8%. As a reminder, the target is 4%, and its achievement is being pushed back further and further each year. GDP growth for the year is expected to be 0,6%. Near-zero growth with rising inflation fits the definition of stagflation, but many are concerned by the inflation figure, which is low compared to historical examples. One might, of course, suspect that the government is artificially understating inflation and overstating growth. The problem is that these indicators are inversely correlated. Since GDP is calculated in rubles, the more rubles that flow through the economy, the higher the GDP growth will be. These additional rubles could come from adding goods and services, or from making them more expensive. So, GDP growth with moderate inflation is possible, but decline or stagnation with high inflation is unthinkable. If there is talk of embellishment of the figures, it is clearly to a very limited extent.
However, relatively low inflation is currently maintained only by the Central Bank's tight policy, which recently, rather demonstratively, refused to lower the rate. Meanwhile, everyone can already see that Putin is Central Bank Governor Elvira Nabiullina's only defender: even the Ministry of Finance, which is in tandem with the Central Bank until 2025 (the Central Bank maintains the rate, the Ministry of Finance restrains spending), broke down last year and is now setting aside as much money for the war as is required. Meanwhile, Putin is clearly wavering: he sometimes says the rate should be lowered, then corrects himself: no, now is not the time. It would be interesting to compare these statements with his meetings with the Central Bank governor and other ministers.
Last week, after the Ministry of Economic Development’s forecast became public, Putin gathered meeting On economic issues. Naturally, all the required optimistic words were spoken for the press: yes, GDP growth is "around 1%," but unemployment is low, wages are rising, so are non-oil and gas budget revenues, and retail sales are booming. The budget deficit in 2027 will, of course, have to almost double—to 2% of GDP instead of the previously planned 1,2%—but the war is the priority. And rising oil prices will help, Putin hoped.
Meanwhile, advisor to the head of the Central Bank, Kirill Tremasov claims, that stable inflation has shifted from the 4-5% range to the 5-6% range—meaning the target inflation level won't be reached in the near future. This means the rate needs to be raised, not just lowered. But who's going to allow it? Especially since the budget is already spending more and more money on servicing the national debt, and budget deficit By the end of the first eight months, it had already reached 2,5% of GDP, and it's not entirely clear how it will be reduced. Or rather, it's clear how and where they will reduce expenses and try to increase revenue, but given that military spending is growing year after year at an unprecedented pace (by 30% this year compared to last year, according to counting According to analyst Janis Kluge of the German Institute for International Security Studies, it is hard to believe that it will be possible to reduce not only the existing deficit, but even the rate of its growth.
However, Russia lacks another component of stagflation—high unemployment. On the contrary, unemployment is unusually low—2,3% according to the latest data. However, there is a specific element of Russianness here.
The country has never had any real social protection for the unemployed: no adequate benefits, no effective retraining and job placement mechanisms. Moreover, unemployment is stigmatized: anyone registered at the labor exchange will always raise suspicions among employers and HR staff. However, unemployment in Russia is currently calculated according to ILO standards: not only those officially registered are counted, but also all those who are unemployed but actively seeking work.
That's just labor market The employment situation in Russia is skewed, and this skew is growing: there's a shortage in sectors related to war and national security (like citizen surveillance), a shortage in low-paying jobs, and a shortage in those sectors where wages at least cover basic needs. Meanwhile, the number of resumes has consistently exceeded the number of vacancies since this year. Moreover, the sectors suffering most are those that have been consistently peaceful—IT outside the military and security sectors, advertising and marketing, and small business services. But desperate job seekers don't go to the labor exchange or sit at home—they won't pay their mortgages—but instead turn to jobs like couriers, warehouse workers, and other jobs where they are registered as self-employed under temporary contracts.
The picture that emerges is interesting: unsuccessful job seekers are happy—they don't have a compromising unemployment record; their employers are happy—they save on taxes and payroll contributions (the self-employed pay 6%, while employers would have to deduct over 40% of wages in taxes and contributions); and the statistics are also pleased—after all, everyone is employed, and there's no unemployment. However, this situation is highly precarious: if the consumer economy, which is currently absorbing these people, falters, they'll end up on the street. And then unemployment could skyrocket unexpectedly quickly and dramatically.
Danger points
And the consumer economy is already in a precarious position. On the one hand, compared to last year, the volume in August consumer spending grew by 12,5%, and adjusted for inflation, by 5,7%. On the other hand, fuel shortages and attacks on marketplaces took their toll: spending on marketplaces in the summer fell by 15%, and the fuel crisis is starting to change consumer behavior. If these attacks continue, the consumer economy will begin to shrink.
There are other dangers too. According to data Financial TimesSpending cuts in 2027 could impact civilian, non-military items totaling 5,4 trillion rubles. What does this mean? Primarily, staff reductions in public institutions, reductions in real benefits due to the combination of positions without full supplementary pay, the abandonment of salary indexation, and bonus cuts.
The first warning signs have already started ringing. Russian regions have already begun cutting back. doctors: Polyclinics and local hospitals are funded from regional budgets, and they're not doing well right now. Teachers have been laid off for a long time now—especially "unnecessary" ones, like second English teachers or those who combine geography and history, physics and mathematics, and so on. There are also layoffs in the private sector: even bank clerks They're cutting staff, despite the fact that banks are making good profits thanks to high interest rates—this includes the transition of clients to online services with branch closures, the implementation of AI, and difficulties with borrowers in the business and consumer sectors. I recently spoke with an employee of a department in one of Russia's regions—she came to Serbia on vacation, as she put it, "for the last time." She's over 50 and a clear candidate for layoffs, which have begun in her relatively wealthy region. "There were layoffs before, but they always involved 'dead' positions. Now they're cutting to the quick," she complained. Layoffs are even underway in Moscow and the Moscow region, according to Moscow Mayor Sergei Sobyanin. ordered Reduce the staff of public institutions by 15%. Previously, when layoffs occurred, the mayor's office transferred employees to affiliated organizations; now the layoffs are real.
If someone loses a job or suffers a salary cut, they begin to save. Even fears of this kind force people to cut spending and build a "financial cushion." In this case, only citizens' savings will grow, not their actual purchases of goods and services—consumption will increase only by the rate of real consumer inflation, or even less. Without clients and customers, consumer businesses will begin to cut even more, primarily on employees and their salaries. This, in turn, will further reduce consumer activity. Therefore, it's possible that economic growth will be even weaker next year.
Meanwhile, inflation is bound to accelerate. Tariffs are expected to increase as early as October 1st, and it's possible they'll be higher than planned due to the need to spend money on drone protection. Energy companies are already demanding include in tariffs The corresponding costs—and how are, for example, heat or water suppliers any worse? Incidentally, the obligation to spend on such protection is imposed on all businesses under the threat of nationalization—it's strange to expect them not to pass these costs on to their prices.
Food prices could rise again by the middle of next year. After Russian wheat exports were virtually halted in the Black Sea by Ukrainian forces, farmers expectedly reduce Winter wheat sowing area. Sowings are decreasing potato, as well as its yield (here we have "thanks" to the Ministry of Agriculture, which banned the import of seed potatoes) - as a result, at the height of the season, potatoes on the shelves do not get cheaper, but get more expensive.
However, the fuel crisis will also increase the price of all goods, including food. It's already clear that its resolution is only possible if fuel prices roughly double: right now, a tanker loaded with Indian diesel fuel is docked in Murmansk, which should retail for around 140 rubles per liter. Belarusian diesel is also slightly less expensive. Independent gas stations already have market-based prices, as their owners purchase fuel on the exchange. Oil companies' stations still offer government-recommended prices—but gasoline isn't always available at these prices. Clearly, the only solution is to let prices rise. But that also means higher inflation.
Who will be worse?
Stagflation hits everyone hard, but there are those who suffer even more.
Regionally, the worst-off regions are those with lower incomes—their budgets lack sufficient funds to support the economy and citizens, and both citizens and businesses are primarily employed in low-income sectors. Regions heavily oriented toward consumer economies are also at risk, especially those dependent on tourism.
In business, the main blow falls on small businesses and banks, who are being repaid loans that have significantly depreciated in value.
Among the population, the hardest hit are those dependent on the budget—public sector employees, welfare recipients, and pensioners, whose salaries, benefits, and pensions are no longer indexed to real inflation. Deposit holders will also suffer—unless, of course, they convert their savings into foreign currency or other assets. Among wage earners, as already mentioned, those in the consumer sector are at risk—from manicurists to delivery workers. However, not all of them: auto repair shops will likely experience a boom—people will stop buying new cars and instead diligently repair old ones. Construction will grind to a halt, meaning bankruptcies and layoffs will begin in the industries that support them (cement, rebar, brick, and carpentry). These will be followed by the production and sale of furniture, home goods, and everywhere else.
And most importantly, stagflation, unfortunately, unlike crises, can last not just for years, but for decades. And so far, only a bitter cure has been invented for it.
