Inflation, expected and unexpected: why prices in Russia are persistently rising faster than forecasts

And prices are still rising, and unfortunately, faster than expected and than official forecasts predicted. For example, the latest (September) forecast from the Russian Ministry of Economic Development assumes that prices will grow by 6.8% for 2025, while the Bank of Russia's forecast is 6.5-7%. Basically, it's more or less the same. And all would be well, but the country entered the current year with an official forecast of 4.5%. This means that final annual inflation will be significantly higher than the target. However, in this regard, this situation—the discrepancy between projected and actual inflation—is by no means unique. For example, the initial forecast for 2024 also projected inflation of 4.5% for the year. The actual figure was 9.5%, more than twice as high. The discrepancy between the forecast and the actual result is very significant. This is some unexpected inflation.

To improve the accuracy of its inflation forecasts, the Bank of Russia has long, and not without reason, paid special attention to the public's inflation expectations. And the Bank of Russia is right to do so, as inflation expectations have long since become a significant independent factor influencing inflation rates.

What are inflation expectations? The name itself speaks for itself: it's the inflation rate the public expects over a given period (for example, one year or five years). There's also so-called "population-observed inflation," which is how people themselves estimate the current inflation rate.

But let's return to inflation expectations and why they really matter. Look, the Ministry of Economic Development forecasts inflation, for example, to be 4% in 2026. Meanwhile, the public expects inflation to be 12.6% over the next 12 months (according to a survey conducted in October 2025 by FOM commissioned by the Bank of Russia). What a difference—more than threefold!

However, it's not just a matter of differing estimates; we now want to understand the importance of expected inflation. Expected inflation is important because people make decisions about how to manage their money, and what economic plans are feasible and what isn't, based on their own perceptions of future inflation. They may take official forecasts into account, but they are still guided by their own perspective—by what they experience in their everyday lives. In other words, their economic behavior largely depends on expected inflation.

Moreover, not only individuals but also businesses rely on expected inflation rates. They base their pricing and investment policies, among other things, on expected inflation. Businesses have learned that expected inflation rates, while typically somewhat overstated, often turn out to be closer to actual figures than officially forecast inflation. In this case, businesses can preemptively raise prices for their goods or services.

It turns out that expected inflation influences, albeit indirectly, actual inflation.

This, incidentally, is an example of why modern economics is rightly called behavioral. After all, these are just expectations, ideas about what prices might be like in the future, but they already influence those very prices through people's behavior.

Interestingly, actual inflation also influences expected inflation. It's simple: if price growth accelerates, this acceleration will inevitably be reflected in expected inflation figures.

Okay, so there's a correlation between actual and expected inflation. But why is the difference between officially projected and expected inflation so large? The answer to this question is the same as the one to why official inflation is almost always significantly lower than the inflation people themselves estimate (so-called observed inflation). The reason is purely psychological: consumers' attention is always focused on those goods and services that are rising in price the most. They don't pay much attention to things that aren't rising in price or are even getting cheaper. This is natural. As a result, people get the impression that inflation is much higher than the official actual rate.

Let's look at this situation using a specific example. At the end of last October (let's take, for example, the week from October 21st to 27th), prices overall rose by 0.16%, according to Rosstat. Less than two tenths of a percent is very small and hardly noticeable. But you'll agree, it didn't seem that way to us. And it didn't seem that way because in that week alone, cucumber prices rose by more than 5%, and tomato prices by almost 3.2% (since the beginning of October, tomato prices have risen by almost 24%).

Gasoline prices continue to rise. Yes, not like cucumbers and tomatoes, but 0.4% in one week is still a significant increase, especially when compared to how much goods and services have risen in price overall over the past seven days.

In this situation, it's tomatoes, cucumbers, and gasoline that will determine how people perceive both observed and expected inflation. And the public won't particularly pay attention to the fact that some things actually fell in price during the week of October 21st–27th: for example, vacuum cleaners fell by 1.4%, smartphones by 1.2%. Hey, what vacuum cleaners and smartphones are we talking about when cucumbers and tomatoes are in such bad shape? This is how inflation expectations are formed. This explains why inflation expectations are often overstated.

But why is officially forecasted inflation often, on the contrary, underestimated? The Russian Federation's socioeconomic development forecast for 2026 and the planning period of 2027 and 2028 projects inflation at 4% over the next three years. Frankly, that's unlikely to happen. But why is the Central Bank so zealous in defending its 4% inflation target?

I suspect that inflation expectations are at play here too. There's a reason officially forecast inflation appears unreasonably low. This is precisely how regulators try to influence inflation expectations.

The logic is this: the official inflation forecast is a benchmark, a kind of anchor that people and businesses can't ignore. But while businesses accept this benchmark, I'm far from sure about the public. Consumers have a different benchmark, say, cucumbers and tomatoes. What inflation forecast are you talking about?

So it turns out that, to put it bluntly, understated inflation forecasts don't really anchor inflation expectations at the right level.

There's another problem. For official forecasts and targets to influence inflation expectations, they must be perceived as credible by consumers. Unfortunately, many who are even aware of official forecasts don't trust them very much. Consequently, they play virtually no role in shaping inflation expectations.

The conclusion is this: even if official inflation forecasts are not as optimistic, if they become more reliable, this will be better for both inflation expectations and the level of actual inflation.

Another interesting fact is that inflation expectations, despite often being overestimated, are closer to actual inflation not only than official forecasts but also than professional analysts' estimates. For example, according to a Bank of Russia survey, professional analysts predicted inflation in Russia would be 4.6% in 2024. This turned out to be significantly lower than the actual inflation rate of 9.5%. Inflation expectations for 2024 (11.5%) were clearly closer to actual inflation. Professional analysts need to improve their assessments of inflation expectations. It's not looking too good: they surveyed people who are guided by the "cucumbers and tomatoes" model, and they turned out to be more accurate in their estimates than professional analysts—financiers and economists.

Inflation expectations are high today: 12–13% is high. The inflationary effect of this level of inflation expectations, unfortunately, will be significant. This means that the problem of elevated inflation has always been and remains. But once upon a time, not so long ago, in 2017, inflation was only 2.5%. This means that nothing is impossible: price increases can be reduced sharply. But we don't expect that to happen yet.