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The history of inflation in Russia is long and painful. Following the revolution of 1917 the country dealt with years of soaring prices, and then faced sustained price pressure in the early period of Josef Stalin’s rule. The end of the Soviet Union, the global financial crisis of 2007-09 and then Vladimir Putin’s first invasion of Ukraine in 2014 also brought trouble. Fast forward to late 2023, as the war in Ukraine nears its second anniversary, and Russian prices are once again accelerating—even as inflation eases elsewhere (see chart).

According to figures published on December 8th, inflation in November was 7.5%, year on year, up from 6.7% the month before. The central bank dealt with a spike in early 2022, soon after Russia invaded Ukraine for a second time. Now, though, officials worry that they may be losing control. At the bank’s last meeting they raised interest rates by two percentage points, twice what had been expected. At their next one on December 15th a similar increase is on the cards. Most forecasters nonetheless expect inflation to keep rising.

Russia’s inflation of 2022 was caused by a weaker rouble. After Mr Putin began his invasion the currency fell by 25% against the dollar, raising the cost of imports. This time currency movements are playing a small role. In recent months the rouble has actually appreciated, in part because officials introduced capital controls. Inflation in prices of non-food consumer goods, many of which are imported, is in line with the pre-war average.

Look closer at Mr Putin’s wartime economy, however, and it becomes clear that it is dangerously overheating. Inflation in the services sector, which includes everything from legal advice to restaurant meals, is exceptionally high. The cost of a night’s stay at Moscow’s Ritz-Carlton, now called the Carlton after its Western backers pulled out, has risen from around $225 before the invasion to $500. This suggests that the cause of inflation is home-grown.

Many economists blame government outlays, which are soaring as Mr Putin tries to defeat Ukraine. In 2024 defence spending will almost double, to 6% of GDP—its highest since the collapse of the Soviet Union. Mindful of a forthcoming election, the government is also boosting welfare payments. Some families of soldiers killed in action are receiving payouts equivalent to three decades of average pay. Figures from Russia’s finance ministry suggest that fiscal stimulus is currently worth about 5% of GDP, a bigger boost than that implemented during the covid-19 pandemic.

This, in turn, is raising the country’s growth rate. Real-time economic data published by Goldman Sachs, a bank, point to solid growth. JPMorgan Chase, another bank, has lifted its GDP forecast for 2023, from a 1% decline at the start of the year, to 1.8% in June and more recently to 3.3%. “Now we confidently say: it will be over 3%,” Mr Putin recently boasted. Predictions of a Russian economic collapse—made almost uniformly by Western economists and politicians at the start of the war in Ukraine—have proven thumpingly wrong.

The problem is that the Russian economy cannot take such rapid growth. Since the beginning of 2022 its supply side has drastically shrunk. Thousands of workers, often highly educated, have fled the country. Foreign investors have withdrawn around $250bn-worth of direct investment, nearly half the pre-war stock.

Red-hot demand is running up against this reduced supply, resulting in higher prices for raw materials, capital and labour. Unemployment, at less than 3%, is at its lowest on record, which is emboldening workers to ask for much higher wages. Nominal pay is growing by about 15% year on year. Companies are then passing on these higher costs to customers.

Higher interest rates might eventually take a bite out of this demand, stopping inflation from rising more. An oil-price recovery and extra capital controls could boost the rouble, cutting the cost of imports. Yet all this is working against an immovable force: Mr Putin’s desire to win in Ukraine. With plenty of financial firepower, he has the potential to spend even bigger in future, portending faster inflation still. As on so many previous occasions, in Russia there are more important things than economic stability. ■