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Aug 22, 2022
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Why prices are falling and we don’t notice it

Consumer prices in July, according to Rosstat, fell by 0.39%. Yes, like this: everything is calculated up to hundredths of a percent, although it looks funny, you see. The main thing is that, it turns out, prices are falling. By the way, according to official information, annual inflation has been declining for the third month in a row. Didn’t notice?

Very many, having heard such information, will never believe that prices have decreased. So could it be true or not? Let’s still take a closer look at prices that are declining (using the example of the same past July 2022). Or do they not go down?

First, let’s clarify how inflation is calculated. Figuratively speaking, it is considered as the “average temperature in the hospital”, which, as you know, is closer to 36.6 ° C. And all because some patients have a low temperature, while someone, of course, has an increased temperature. Well, the average is almost normal.

Now we look at prices in July, which on average decreased. Indeed, fruits and vegetables, including potatoes, fell in price by 11.5%. This is a lot, but given the almost peak fruit and vegetable season, it is probably not surprising. Chicken eggs fell in July by 4.4%, granulated sugar – by 3.5%, buckwheat – by 3.2%. Even bagged black tea dropped in price by 1.3%…

However, our consumer attention naturally turns not to those products for which the price has decreased, but to those that have risen in price. For example, those who could afford it, of course, noted how the prices for chilled and frozen cut salmon fish jumped. Now these people will be very surprised, but it turns out that the increase in fish prices over the past month was only 1.5%. By the way, margarine, caramel – by 1.4%, cereal flakes (breakfast powder) – by 1.3%, semolina – by 1.1% rose in July by the same amount. Of the food products that went up in price in July 2022, chewing gum is the leader, the price of which increased by 2% over the month. Do not be surprised, there is no mistake, chewing gum really goes through the “food” group. I hope that this is still not a reason to eat chewing gum.

So, our attention is focused not on what has fallen in price, but on what has risen in price. It is clear why – people care about it much more. Therefore, the effect of fish that has risen in price for our perception is much greater than the effect of vegetables that have become very cheap. Moreover, the decline in prices for vegetables in July is natural. How else? Therefore, our feeling of inflation is unequivocal: everything becomes more expensive.

Now let’s see what happened in July with the prices of non-food products. The leaders of price growth are matches, which have risen in price by 2.3%. Few people use matches now, plus, compared to other goods, they are traditionally inexpensive. And our attention, our impression of what was happening with the prices of non-food products, of course, was not due to matches.

But for millions of Russians, it is of great importance how much school textbooks cost, how much it generally costs to collect a child by September 1. So, the growth leaders turned out to be: textbooks and teaching aids – their prices increased by 2.2% in July, and trousers for school-age children made of semi-woolen fabric – by 1.9%. There were other noticeably more expensive goods: toilet soap – by 1.9%, sewing threads – by 1.8%, diapers for newborns – by 1.7%.

Now let’s look at what non-food products were “in opposition” in terms of cost dynamics: two-chamber refrigerators, prices for which decreased by 6.3% in July, cameras – a decrease of 5.6%, metal tiles – by 5.1%, mixers and blenders – by 4.8%, sewing machines – by 4.7%.

And here it is about the same as for food products: people’s attention is much more concentrated on more frequently bought textbooks and diapers than on sewing machines and two-chamber refrigerators. The latter are purchased once in many years. These are not diapers, toilet soap and textbooks, which are required regularly.

Therefore, it is not surprising that the impression is unequivocal: everything becomes more expensive. Statisticians, after calculating the dynamics of prices for all goods, come to a different result.

Finally, to complete the picture, let’s see what happened in July 2022 with prices and tariffs for certain groups and types of services. I note that this is the third (and last) group for which consumer inflation is calculated: food products, non-food products, services. Are there really some types of services here that have fallen in price in July? Imagine there is. This is digging a grave – by 0.4%, installing plastic windows – by 0.6%, the total cost of a comprehensive insurance policy – by 0.8%, a trip to Belarus – by 4.6%, trips to certain countries of Southeast Asia – by 6.1%, fees for the use of consumer loans – by 9.3%.

Now let’s compare it with what has risen in price. Everyone knows about housing and communal services: statisticians say that the cost of water disposal has risen sharply – by 5.6%, as well as the treatment of solid municipal waste – by 5.8%. Even more, not surprisingly, prices for trips to certain countries of Central Asia increased by 5.9%, to some countries of South Asia – by 11.5%, for holidays in the UAE – by 12.2%. It goes without saying that fares for flights in the economy class cabin of an aircraft increased by 14.1% in July.

And yet, speaking about services, the picture for us, consumers, is determined primarily by what is happening with the tariffs for housing and communal services, which have noticeably increased. And no grave digging (God forgive me!), which, according to statistics, has fallen in price by a few tenths of a percent in July, will not interrupt this trend.

With services, by the way, it turned out that the sensations coincided with the formal results of the statistics: we feel that prices have risen, and the statisticians recorded this.

Does this mean that our statistics are absolutely accurate and the whole thing is solely in our perception? No, I would not categorically say this, but sensations and perception – yes, they matter.

And one should not think that this is only a problem of people if they perceive what is happening with prices in this way. It is not that simple! If people are sure that prices are growing much faster than statistics tell them, this forms their so-called inflationary expectations. That is, there is confidence that inflation is high and it will remain so. And this is already an independent pro-inflationary factor, spurring the rise in prices.

It works like this. You, for example, are self-employed, a tutor for example. And we are sure that prices will rise rapidly. In this case, you yourself will rapidly raise prices for your services in order to protect yourself from the future, in your opinion, the rise in price of everything around. Such a vicious circle turns out: confidence in the rapid growth of prices – increased inflationary expectations – really high inflation. And this is only one of the reasons why inflation in Russia is so high throughout the year. About 13-15% annual inflation in 2022 (about these figures official forecasts converge today) is not a very good result, and no reports of deflation in the summer months will correct this estimate. And the reasons? Reasons can always be found, objective and subjective. But the main one is in our heads.

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