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. Last Updated: 07/27/2016

Strains of 2008: Inflation Bugbear Is Back

It's starting to feel a lot like the start of 2008. Should we all be a lot more scared than we are?

Now, like then, the Russian economy was overheating. Now, like then, the grain harvests look like they will disappoint. Now, like then, inflation was starting to climb. And now, like then, everyone was concerned in a kind of background way about how the financial problems in Europe (then U.S. subprime) would play out.

Of course, there are some big differences too. The economy is overheating, but Russia is still only growing at 4 percent; in 2008 it was growing at about 8 percent. The difference is that in 2008 Russia's growth was supercharged by all the inbound credit coming from banks in London and New York. That credit is what did the real damage in the crisis at the end of the year and is almost entirely missing now.

The price of this lack of credit is that current growth rates are half what they were four years ago. But if Europe does blow up in the same way that America did in 2008, then the pain of the ensuing crunch in Russia will be greatly reduced. Half as much? That seems like a fair guess.

Inflation was going to start a crisis even without Lehman Brothers, as the world has been struggling to produce enough food since the advent of biofuels.

The Central Bank was struggling to hold inflation in check following record-high fruit and vegetable prices in June (13.4 percent), pushing the annual rate for the first six months of the year up to 4.3 percent and bringing to an end the 20-year low rates over the first five months of the year. The Central Bank's year-end target of 6 percent now looks unattainable and indeed, Alfa Bank just put its forecast up to 6.7 percent by the end of the year (which is not a disaster).

The harvest will be important, but here too we are headed for trouble, which will also send up prices. The forecast for the harvest was just cut to 80 million tons — way off the bumper crop of more than 100 million tons in 2007 and still shy of the 90 million to 95 million tons that is usual for Russia.

Ukraine is also having a bad harvest and predicted that it will produce 15 million tons less than normal, and there is a drought in the United States, but the harvest in Turkmenistan was so bad the cost of flour has doubled and that of bread trebled, and the government just introduced rationing. Grain prices were up in southern Russia by 56 percent and in Ukraine by 34 percent.

Alfa Bank is arguing that the low inflation over the start of the year was partly due to capital outflow and the general economic malaise smothering the globe. Capital outflow is slowing, which will push prices up, and if the world's economy recovers a bit more, then companies will also start spending some of that cash pile they have built up.

This all adds up to a likely price shock after the summer, which was one of the triggers for the 2008 crisis. Still, don't be too worried — as the global economy, Russia included, is still on its knees, it won't have as far to fall this time around.