Analysis of Inflation Risk Factors in Russia

Abstract

This paper uses quantile regression combined with the local projections approach to study the impact of macroeconomic and financial factors on the conditional distribution of inflation and inflation risk in Russia, i.e. the probability of high values of price growth. It is shown that the main predictors of growth in inflation risk are increases in nominal wages and retail turnover, the weakening of the Russian rouble, and declines in production. In addition, geopolitical tension and the narrowing of the bond spread could indicate the intensification of this risk. It is revealed that the effect of the pass-through of the dynamics of the exchange rate to consumer prices is manifested even more with growth in the inflation rate. At the same time, in a high inflation environment, the strengthening and weakening of the Russian rouble are passed through to prices with varying intensity, greater in the second case. A notable reduction of the risk of critically high inflation may require the central bank to take comprehensive measures to fight inflation, since the effect of a rising interest rate on inflation risk is less significant compared to the effect on the average value of price growth.