Consider a hypothetical example: a construction project lasting 3 months. The estimate was agreed in September, materials are bought in stages, and some work is paid for later. In December, the supplier sends a new price list, and some purchases cost more than budgeted. The paperwork still reflects the agreement, but the profit margin has narrowed.
This is one way inflation can affect a business: the contract price has already been fixed while costs have had time to change.
We will explain inflation in simple terms, how indices are used to calculate it, what it affects and which decisions help business owners keep project finances under control.
Contents:
What is inflation in simple terms?
Inflation is a sustained rise in the general level of prices for goods and services. The word “general” matters: inflation describes changes in the price environment across the economy. A rise in the price of one item alone does not establish that. Source: Bank of Russia. (in Russian)
Put more simply, the same amount of money buys less over time. Its nominal amount stays the same, while its purchasing power falls.
Russia uses the consumer price index (CPI) to measure inflation. It shows how the cost of a “basket” of goods and services bought by a typical household changes over time. Rosstat monitors prices and publishes the CPI; the Bank of Russia uses these data as its main reference. Source: Bank of Russia. (in Russian)
There is also a practical distinction: inflation in the news may differ from the inflation experienced by your household or business. If food and rent account for a large share of a household budget and their prices rise faster than those of other items, price increases may feel stronger. If a business depends on imported components, exchange rates have a separate effect. Rosstat explains why people's perception of price increases may differ from the official figure: the broad basket contains items whose prices rise and fall, while people notice what they buy frequently. Source: Rosstat. (in Russian)
Why does inflation occur?
Several factors can affect inflation at the same time and reinforce one another. Three basic scenarios are enough to help a business owner understand the mechanism.
The first scenario is demand growing faster than supply. It is a familiar situation: the season is busy, people buy more actively, and there are too few service providers. Companies see queues and raise prices because they can sell at higher prices without losing sales volume.
The second scenario is rising business costs. Materials, logistics, rent, wages and borrowing have become more expensive. Companies have to adjust their price lists to maintain financial viability. The Bank of Russia describes cost-push inflation as one mechanism behind rising prices. Source: Bank of Russia. (in Russian)
The third scenario involves exchange rates and imports. If goods or materials include imported inputs, a weaker ruble raises their purchase cost. This can happen even when the final product is “made locally”, because it may contain imported components. The Bank of Russia describes this as the effect of exchange rates and their “pass-through” to prices. Source: Bank of Russia. (in Russian)
In construction and renovation, these scenarios can form one chain. Seasonal demand increases, skilled workers are scarce, and wages rise. At the same time, the supplier sends new material prices. If customer prices were fixed “forever”, you cover the difference yourself.
How is inflation calculated?
Inflation can be calculated using an index: take a basket of goods and services, establish what it cost in the base period, and compare that with the cost of the same basket today. This is how the CPI works: it is the ratio of the cost of a fixed basket at current prices to its cost in the previous or base period. Source: Bank of Russia glossary (in English).
Rosstat's educational page shows this calculation: inflation = index − 100%. It applies when the index is expressed as a percentage of a chosen base period set at 100%. For example, if that index is 105%, prices have risen by 5% relative to the base period. Source: Rosstat. (in Russian)
For indices that share the same reference base, the formula for inflation over a period is:
Inflation rate, % = (CPI in the current period / CPI in the base period − 1) × 100%. Both indices must use the same reference base. Successive indices measured “against the previous month” cannot be divided by one another using this formula.
Here is an everyday illustration. Suppose a “basket” of typical purchases cost 10 000 ₽ last January. This January, the same items in the same quantities cost 10 800 ₽. Then:
(10 800 / 10 000 − 1) × 100% = 8%
That is the annual inflation for this basket. In practice, Rosstat uses a much larger basket, collects prices across regions, calculates indices for groups of items and combines them into an overall figure.
To estimate “personal inflation” for your business, use the same logic: fix your own basket of costs and compare its cost over time. A renovation company's basket often includes materials, crew payroll, tool hire, logistics and subcontractor services.
- Set the comparison period: month on month, December against December, or year on year.
- List the main cost items and keep quantities identical: the same material brands, work and services.
- Calculate the basket's cost in the base period.
- Calculate the basket's cost in the current period.
- Apply the formula (current cost / base-period cost − 1) × 100%.
To avoid confusion over costs, separate direct and indirect costs in advance and record them consistently from month to month. This makes the comparison reliable: you can see what belongs to the project and what belongs to the company. A useful related article explains direct and indirect costs (in Russian).
You can use the 101 app to track project costs: record expenses consistently so that you can compare them using the same rules.
What does inflation affect in everyday life and business?
The first effect is immediately visible: purchasing power. If prices charged and wages stay unchanged, the same money buys less. This applies both to personal finances and to a project's budget.
The second effect appears in lending and interest rates. When inflation is high or unpredictable, lenders price the risk into interest rates, and businesses become more cautious about long-term commitments. Even without detailed macroeconomic models, business owners see this in the market: funding becomes shorter-term, borrowing costs rise and conditions tighten.
The third effect is a distorted sense of profit. The accounts show a profit, but in practice that money offers fewer opportunities. Consider a hypothetical example: a company increases annual revenue, the numbers show growth, and the owner thinks all is well. It then turns out that margins have fallen because of material and labor costs, while cash flow gaps recur. It is important to calculate profitability regularly and compare it with turnover. See the article on calculating business profitability and the explanation of cash flow gaps.
The fourth effect concerns negotiations and contracts. The longer a project lasts, the greater the chance that costs will change along the way. If the contract has no mechanism for revising the price, your profit bears that risk. This can be particularly painful in construction: work may last months, purchases are spread across stages, and subcontractors invoice on different dates.
The fifth effect concerns the financial buffer. Inflation makes reserves more important: money in a fund buys time while the estimate is revised, the customer considers the proposal or the supplier postpones delivery. Related articles explain how to create a reserve fund and why a company needs a fund and how it helps during a crisis (in Russian).
What should business owners know about the inflation rate?
The word “rate” may sound like macroeconomics, but in practice it is a working reference: how often to revise prices, how much of a buffer to keep, how to assess deferred payments and what to do about wages.
The first useful point is that inflation is published for different comparisons: month on month, year on year and since the start of the year. The Bank of Russia explains that comparison periods can differ, which changes how a figure should be interpreted. Source: Bank of Russia. (in Russian)
Second, an inflation target differs from the actual figure. For example, the Bank of Russia's inflation target in Russia is 4% year on year. As a historical example, the November 2025 edition of “Inflation in Russia” (in Russian), published on 12 December 2025, reports annual inflation of 6.6%. This is a Russian figure for that particular period. It does not describe current inflation or set a target for other countries. The definitions of the target and the indicator (in Russian) are provided by the Bank of Russia.
Third, your “cost inflation” may exceed the official figure. If a company uses materials with a high share of imported inputs, spends heavily on logistics or depends on specialized professionals, its cost increases may outpace the economy-wide average. Regularly tracking project costs and margins helps assess your own cost trend.
Below are several decisions that usually help business owners control inflation risk. They involve discipline in agreements and accounting.
- Regular price-list updates. If costs change more frequently than once a year, an annual price review may lag behind. Regular reviews help account for actual cost changes when setting prices. For practical guidance, see the article on updating price lists in the 101 app (in Russian).
- Price-revision rules for long projects. For contracts lasting several months, decide in advance what happens when materials and subcontractor services become more expensive: whether to fix the price permanently, fix only the labor price or provide for indexation. For a transparent pricing model with the customer, see the approach to open markup (in Russian).
- Advance payments and payment schedules. The longer a payment is deferred, the greater the risk that the money arrives later with different purchasing power. This relates to discounting: comparing money received on different dates and assessing payment deferrals. A detailed explanation covers discounting money.
- Cost control by project. Calculate costs regularly, using consistent rules and separating direct costs from overheads. This reveals which items are becoming more expensive and where margins are being lost. A useful starting point explains calculating the cost of a service.
- Reserves and a company fund. Inflation increases the cost of mistakes. A reserve helps the business get through a revised estimate, a delayed payment or a disrupted delivery. This is discussed in the article on reserve funds.
There is another practical indicator: if a company raises prices “by feel”, conversations with customers become tense. If it uses numbers—costs, margins and cost inflation—those conversations become shorter and calmer. For the connection between prices, analytics and profit, see the article on increasing the average transaction value (in Russian) and the explanation of revenue.
To see how to organize management accounting by project, book a demonstration of the 101 app and discuss your workflow with an expert.
Frequently asked questions about inflation
Is inflation always bad? High and unpredictable inflation makes planning harder and reduces confidence in long-term decisions such as investments, large projects and borrowing. Low and predictable inflation makes calculations easier: businesses can assess payback more readily, customers can make decisions more easily, and banks can offer longer-term financing. The Bank of Russia describes this as “price stability” and its effects. Source: Bank of Russia. (in Russian)
Why can official inflation feel lower than personal inflation? People and companies buy different baskets. Your basket may contain items whose prices rise faster than the average, and you see that every day. Rosstat explains this perception gap: prices within the broad basket move in different directions, while people focus on their regular purchases. Source: Rosstat. (in Russian)
How can business owners use the inflation figure in management? As an external reference for how often to review prices and for negotiations. Within the company, it is more useful to calculate “cost inflation” for your own basket and relate it to project margins and profitability. Collecting figures regularly makes management easier: you can see where performance has weakened and what to change in the price list or payment terms.
What should you do now if projects last a long time and material prices change? Revise the rules: specify which parts of the project price stay fixed—labor, overheads and margin—which depend on the market, such as materials, and how revisions will work. At the same time, set up accounting so that costs and margins are calculated from actual data, without manually piecing information together from chats.
