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  1. Home
  2. / Investing
  3. / Economic Data

Russia's Runaway Cabbage Price Inflation Teaches Us a Lesson

Russian cabbage inflation may be rising, but Russian stocks are dirt cheap.
By ANTONIA OPRITA May 22, 2015 | 11:00 AM EDT

Russia's runaway cabbage price inflation has taken the internet by storm. Stories about the massive jump in Russian cabbage prices have sprung up everywhere -- and for good reason.

But is massive inflation an isolated Russian cabbage phenomenon or does it happen elsewhere, with other things? And what can be done to deal with the issue?

Cabbage is a staple in Russia, being used in many traditional dishes, along with beets and potatoes. But, according to some specialists, Russia only produces about 75% of the cabbage it consumes. One consequence of that is that any weakness in the ruble will be reflected in the price of cabbage, as some of it has to be imported.

Most of the 25% that Russia needs to buy from abroad comes from the European Union. But, as Vladimir Putin has imposed tit-for-tat bans on imports from the EU after Western sanctions on his country, the supply of cabbage in Russia has been squeezed even further. Early frost that damaged some of last fall's Russian cabbage crop has made an already bad situation worse.

According to a report by the Moscow Times, cabbage now costs over 40 rubles ($0.80) a kilogram in most Russian stores, with some of these stores having raised prices by as much as 400%. Other sources of data show that prices "only" doubled since July, from about $0.42 a kilogram.

It looks like the story of runaway inflation is confined to Russian cabbages, for now at least. But at the end of the day, inflation is nothing else than too much money chasing too few goods. And if we take a broader look, we see some interesting patterns emerging.

Let's stop thinking about consumer price inflation for a minute, as this only shows a limited picture of what's going on. If in Russia the cabbage price inflation was caused by too many rubles chasing too few cabbages, in the UK for instance, house price inflation is caused by too many pounds chasing too few houses.

With lots of restrictions in place on building around and in London and with many government subsidies encouraging buyers, as well as a lax regulatory and fiscal regime attracting foreign buyers, prices for residential property in the UK, especially in the capital and the Southeast, have skyrocketed.

This led to an increase in wealth on paper for UK residents of 19% in the last year.

The picture is pretty much the same across northern Europe, with house prices in Sweden at such high levels that the only way borrowers can stay out of negative equity is if prices continue rising.

The Bank for International Settlements (BIS) warned in a report in March about residential property bubbles forming, while the Financial Times reports that bankers -- not usually the ones to go out of their way asking for more regulation -- have demanded that regulators take more action to prevent asset price bubbles.

In the U.S., it looks like the equity market is bearing the brunt of inflation, with stock buybacks diminishing supply in some cases.

A warning earlier this month from Fed Chair Janet Yellen that stocks on Wall Street are expensive was similar to another one she made last July, in which she said biotechnology stocks were overvalued.

Some analysts have warned that bonds, and especially high-yield bonds, have been in a bubble for years, and this seems to be especially true for the eurozone, where the European Central Bank has embarked on a massive quantitative easing program.

The recent bond tantrum, in which European bonds sold off and yields on German bunds jumped sharply, could be the market's way of showing that investors are worried about asset price inflation there, too.

For the first time since the 2013 taper tantrum, capital has flown out of both stocks and bonds in Europe.

In Russia, it's consumer price inflation, and especially cabbage price inflation, that is running wild, while assets such as equities are dirt cheap, as nobody dares to buy them. In the West, it's asset price inflation that gives regulators headaches while consumer prices are tame.

Maybe it's time to bury the hatchet? That way, the Russians will be able to get their some of their beloved cabbage at reasonable prices from the EU, while Western investors will have a chance to buy some cheap Russian stocks.

And hopefully, we'd avert two crises in the process: a geopolitical one and an economic one.

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TAGS: Economic Data | Investing | Markets

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