Oct 16, 2021
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We are advised to stifle inflation: spend less and save more

We are advised to stifle inflation: spend less and save more

Photo: Anton Novoderezhkin / TASS

The official inflation forecast has risen sharply. The authorities, under the pressure of large-scale and uncontrollable price increases, are forced to admit that this figure has gone beyond the promised and more or less “decent” framework. Then how will real inflation rise? And what will happen to prices, to the ruble exchange rate?

The Ministry of Economy of Russia has raised the inflation estimate for 2021 by 1.6 forecast points (pp) to 7.4%, the head of the department told reporters Maxim Reshetnikov

Earlier, the department predicted inflation at 5.8%. The main contribution to the rise in prices, according to the minister, is made by the rise in prices for products. Against this backdrop, the government has developed measures to correct food inflation, he added. At the same time, the Ministry of Economy does not change forecasts for inflation and other parameters for 2022-2024. Russia is expected to return to 4% at the end of 2022.

“The events that take place in the external and internal markets of food and goods, led us to the need to adjust the inflation estimate at the end of the year … Taking these factors into account, we adjusted the inflation estimate at the end of the year by 1.6 forecast points up to 7.4%. About 90% (or 1.4 percentage points) of the deviation is explained by food prices (another 0.2 percentage points are accounted for by non-food products), ”Maxim Reshetnikov said at a briefing.

– With a high degree of probability, the figure named by the Ministry of Economic Development and Trade will be exceeded. Real inflation will be higher than the forecast level, since we have already reached this level – in annual terms, – believes Alexander Abramov, chief analyst at Solidarity Bank. – There are several reasons for the sharp rise in inflation. First, food prices are rising around the world. The corresponding index of food price increases has risen by about a third over the past year. But this is not the only factor. In recent weeks, new ones have emerged. It is difficult to remember such a case that the forecast given by the Ministry of Economy became so much outdated in just a few weeks. This is due to the sharp rise in energy prices. It would seem that this is beneficial for Russia, and this increases our budget revenues, however, not everything is so simple. The fact is that, firstly, this very seriously increases the cost of a number of goods both in Europe and Asia, where, by the way, there is a very strong rise in gas prices. And if Russian goods are exported instead of being sold on the Russian market, then this will accelerate inflation in our country. Well, and to introduce protective export duties on everything in a row is hardly realizable.

Second factor. There has been not only an increase in energy prices, but in a number of industries in a large number (and their number is growing) countries, the threat of an energy crisis has already arisen. This means that some production will simply be stopped. Or are already stopping. And the subsequent deficit of finished goods will further spur inflation and prices of goods. And this will hit Russia through the import channel.

“SP”: – Will the ruble suffer a lot?

– And here the third factor will play its role: in connection with the rise in inflation in the world, central banks are tightening their policies. And usually, when banks in developed countries raise the key rate, this has a negative impact on the currencies of commodity countries. And, by the way, the effect of this may outweigh the one that we get from the increase in energy prices. Here you can recall 2018, when oil prices were growing month after month, and at the same time the ruble was falling. Because oil prices in our country are balanced by the budgetary rule, and in the face of rising inflation, interest rates on the world financial markets grew, and this also put pressure on the same ruble.

That is, it cannot be ruled out that at some point there will also be a weakening of the ruble, or some crisis phenomena will arise in the financial markets, and through devaluation this will also spur inflation.
And of course, it is now obvious that inflation has reached 7.4% yoy. Therefore, everything that the Ministry of Economy has done simply stated that these rates will not increase until the end of the year. But there is really no such confidence. Because the incoming data signals that weekly inflation is close to 0.3%. If these rates continue, then our inflation will be significantly higher than 7.5% at the end of the year. Therefore, the current forecast of the Ministry of Economic Development can be called rather moderate. Real inflation is likely to be higher.

– The actions of the Central Bank to reduce inflation will have a delayed effect, therefore, it is not necessary to count on a decrease in prices or at least an end to their growth in the near future, – believes Alexey Korenev, analyst at FINAM Group. – Here Minister Reshetnikov, who presented a rather gloomy forecast, is understandable. The fact that the Central Bank is now planning to raise the key interest rate, which in principle puts pressure on inflation, is not a guarantee for us.

The mechanism of pressure, influencing the consumer price index due to tightening of monetary policy, works well in highly developed economies, where the share of consumption is very high, and as soon as the key interest rate increases, the level of consumption decreases, and the level of accumulation rises. This is immediately reflected in prices.

With us, this is not a fact. We are all scared, and you can look at other developing countries, where figures also indicate that high interest rates are not a guarantee that inflation will go down. For example, in Brazil the rate is 6.25% and inflation is 10.25. Mexico – 4.75% rate and inflation 6%. Turkey – 18% rate and inflation – 19.58%. It’s scary to talk about Venezuela, Argentina and Nigeria, there are frenzied rates and frenzied inflation. That is, in developing countries, the mechanism of pressure on inflation by raising rates, firstly, does not always work and is not unambiguous. Another structure of the economy. The second point is that an increase in interest rates does not immediately affect inflation, but rather a large lag. It would seem that an increase in rates should lead to a decrease in purchasing activity and an increase in the attractiveness of bank deposits. That is, an overflow of funds to bank deposits is expected.

“SP”: – This will significantly reduce the cash in the hands of the population?

– And given our level of income, the majority have nothing to put on a deposit, people still carry all their money to the store. In our country, 71% of the population spends more than half of their income on food. This is more than two thirds of Russians. They would be happy to take the money to the bank, this is how they now advise starting the formation of pension savings at their own expense, but they have no money.

The second point, why this measure acts with a certain lag, is that manufacturers and sellers are the first to react. As soon as interest rates are raised, that is, borrowed money will become more expensive, costs for manufacturers, logistics, and retail will increase. And they will immediately shift these costs onto the shoulders of the consumer – by raising prices. And only then, when they see that the consumer cannot buy the product, he has no money, they will go to a gradual reduction in prices. They will have to come to terms with the fact that they have to reduce their margins. And streamline processes to keep costs down. And only then, with a certain lag, the rate increase begins to influence prices. But this will take several months, and there are only three months left until the end of the year.

SP: – Will the Central Bank’s key rate increase be sharp?

– The Central Bank is expected to raise its key rate by 0.25% in October. But I believe that there will be an even sharper step – the rate will be raised immediately by 0.5%. In general, this will immediately have a negative impact on prices, because at first money will rise in price for business, and if money for business rises in price, then, as I said, costs grow, which will be passed on to consumers, and only then and then some slowdown will begin. inflation, when consumers are clearly squeezed out of everything that can be squeezed out in this situation. Therefore, Reshetnikov’s department correctly judged that in October we will see performance even worse than in September. And only in November-December will inflationary growth slow down somewhat. And all the same, in December, when consumer activity is growing strongly due to the upcoming New Year holidays and other similar reasons, the rate of growth of inflation, that is, prices, will again upset us all.

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