Translated material
Compound interest
Annual inflation in Russia may again reach double digits
Inflation is beginning to behave differently than the government would like. In the first three months, it was lower than last year's figures for the same period, which raised hopes of achieving the forecast level for the year - 8%. However, in April and May the picture was fundamentally different. The growth in consumer prices in these months exceeded the figures for April and May last year. Unlike government officials, experts are increasingly confident that it will not be possible to fit into the final 8% fixed in the 2007 budget.Inflation in May, as reported yesterday by First Deputy Chairman of the Central Bank Alexey Ulyukaev, amounted to 0.6%, which is 0.1 percentage point higher than in May last year. In April, we recall, consumer price growth was recorded at 0.6% - also higher than in the same month a year earlier (0.4%).
If this continues, the advantage achieved in the first quarter (fully due to January, February and March) will be completely squandered. So far, according to the results of the first five months, inflation amounted to 4.7%, and this is 1.2 percentage points less than in the same period last year.
In order to keep inflation at the end of the year within the eight percent forecast, the government plans to continue to fight rising prices in the old way - by strengthening the real effective exchange rate of the ruble. In fact, today this is almost the only way for the Cabinet of Ministers to somehow slow down the negative processes in the sphere of consumer prices. Thus, Finance Minister Alexei Kudrin back in mid-May admitted that the ruble would strengthen by an additional 1-2% (now, according to him, the strengthening of the real effective exchange rate is estimated at 4%). However, now the situation with the ruble exchange rate does not cause serious concerns for the government. “Of course, it is better not to strengthen the exchange rate, but in monetary policy we must put inflation first,” Mr. Kudrin said the other day.
Other anti-inflationary measures that the government tried to use in previous years are no longer relevant today. It is hardly possible to limit the growth of tariffs in housing and communal services. And it’s clearly not the right time to talk about curbing budget spending in the pre-election year. Even Alexei Kudrin, who in recent years has been zealously fighting for an increase in non-interest expenses strictly in accordance with GDP growth, has given up.
On the contrary, the economy is awaiting new cash injections. And not only this year, but also in the next three, when inflation is expected to be reduced down to 5-6% per annum. Yesterday, Vladimir Putin instructed the government to take into account in the three-year budget the provisions of his message to the Federal Assembly, where he proposed increasing allocations in a number of key areas, including urban improvement, roads, repair of dilapidated housing, etc. Alexey Kudrin assured the president that 95% of all proposals have already been taken into account, including in the 2007 budget. Let us recall that earlier the Minister of Finance said that the implementation of the president’s orders would cost a total of 750 billion rubles.
Inflationary pressures are seriously aggravated by the enormous influx of private capital. Investors, attracted by the benefits of investing in the Russian economy, are not stingy. Last year was a record year: almost $42 billion came into the country. However, this year money is flowing into Russia even faster. In January-April alone, the net inflow of private capital amounted to more than $31 billion. As Mr. Ulyukaev says, the high rate of growth of the money supply is associated with the influx of capital. As of June 1, compared to June 1, 2006, it increased by 59%. According to the first deputy chairman of the Central Bank, already a year ago, when the money supply on June 1, 2006, compared to June 1, 2005, increased by 49.5%, this was alarming.
There is at least one more reason affecting inflation that officials are not yet talking about, at least publicly. This reason is inflationary expectations. The head of the strategic analysis department of the FBK company, Igor Nikolaev, connects them primarily with the decisions already taken by the government on a significant increase in tariffs of natural monopolies in 2008-2010. Mr. Nikolaev also proposes to pay more serious attention to the dynamics of producer prices, which, for example, in April increased, according to him, by 4.3%. “Over a certain period of time this will result in accelerated growth in consumer inflation,” says the economist. Igor Nikolaev, like most other experts, is pessimistic about officials’ statements that inflation at the end of the year will be kept within 8%. “God grant that we reach 9%, like last year,” he says. However, in the current situation, this, apparently, will not be bad. After all, as Mr. Kudrin complained about ten days ago at a meeting of the State Duma Budget Committee, “with the current rate of waste of budget money, the strengthening of the ruble and the influx of speculative capital, double-digit inflation may begin in Russia.”