Taming Inflation
As the Election Season Ramps Up, the Russian Government Mulls Ways to Keep Runaway Inflation at Bay
Russia may introduce price caps on some staple food items in an effort to control rising inflation, which experts say could hit double-digits this year. Supermarket prices for basic food items surged to a record high last year, and continued their upward spiral in January. But experts say that if implemented, this measure would do little to no good the state would be better advised to focus on improving the productivity of food producers and competition between them.
Deputy Economics Minister Andrei Klepach said on Monday that the Economics Ministry may consider resorting to the tried-and-tested price control system to contain prices, but added that there were no plans to implement this in the near future. "This is a tool which can be used, and I do not rule out that such restrictions will have to be used this year," Klepach told Interfax in an interview. Price caps, if and when introduced, are expected to affect staple foodstuffs like buckwheat, potatoes and other fruits and vegetables, he said.
According to this seldom-used regulation, the government can impose price controls on certain food items for a period not exceeding 90 days if there is an increase in retail price of 30 percent or more in one or more regions. Although the law has since been liberalized, government officials have nonetheless been reluctant to use it, with some, like Klepach, seeing it as a last resort. But since consumer prices rose 1.4 percent for the month through January 17, outpacing growth in the same period last year, officials have stressed that Russia will be hard-pressed to meet its six to seven percent inflation target for 2011. Inflation last year came in at 8.8 percent, versus initial government estimates of six to seven percent after a destructive drought sent food prices surging.
Last summer's abnormal heat also destroyed a quarter of the country's crops, forcing the government to ban grain exports and the Agriculture Ministry to cut its grain forecast to 60 million tons from 97 million tons last year. Prices for buckwheat, flour and cereals spiraled up 30 percent in August, amid panic buying fuelled by rumors about poor harvest forecasts, the State Statistics Service reported. In the Russian Far East, prices of rice and buckwheat almost doubled both as a result of drought in western Russia and a coincidental flooding in southern China.
Klepach defended the government's decision not to impose price caps on buckwheat in the fall, before the harvest season was over, adding that the government had hoped that the situation with buckwheat will be more favorable when Siberian harvests are gathered. Instead, he said, manufacturers and farmers who lost their proceeds to the drought and dwindling harvests tried to maintain a high level of prices as they strove to compensate, wherever possible, for their losses.
The noticeable increase in the prices of foodstuffs that began in the second half of last year is the latest indication that government efforts to bring inflation down are yet to bear fruit, even as politicians are becoming wary of the approaching elections. "There is still a risk of significant increases in the price of grain and hence, the price of bread and meat," Klepach said. Jones Lang LaSalle's economist, Yevgeny Nadorshin, believes that if the anticipated high increase in the price of basic foodstuff materializes, the government will not be able to maintain its forecast of six to seven percent inflation for 2011. He predicted that inflation would be around 9.5 percent in the second quarter.
The growing consumer inflation is also building up more pressure on the Central Bank to tighten monetary policy. Russian Central Bank's First Deputy Chairman Alexei Ulyukayev told a conference organized by Deutsche Bank in London last week that he expected to see an acceleration of inflation in the first quarter. ''My feeling is that at least in the beginning of the year, in the first half of the year, the inflation risks could be estimated as more acute, more serious than the economic growth risks,'' Ulyukayev was quoted by Bloomberg as saying. ''Nevertheless, we still have our official inflation forecast, still the same as it was when we passed our fundamentals of monetary policy in September to October of last year to the Parliament. It means six to seven percent inflation, but it will be very, very difficult to reach such an ambitious target in that case. The core inflation figures are more reasonable.''
Economics Minister Elvira Nabiullina told journalists in Moscow last week that January inflation would likely be 2.1 to 2.3 percent, an instant upgrade from her earlier forecasts, Reuters reported. Rising prices will make it difficult to meet the current official inflation target of six to seven, she said. "So far we do not see any basis to revise our forecast of inflation of around seven percent, although I stress that this is a difficult task," Nabiullina said. She said food inflation, stoked by a poor harvest last year, will ease in the second half of the year. The government plans to use grain reserves to stabilize grain prices and may cut import duties to reduce the price of imports. The Federal Statistics Service (Rosstat) said on Wednesday that the CPI index rose 0.6 percent in the last week, taking the inflation reading of the first 17 days of 2011 to 1.4 percent compared to 1.2 percent in the same period in 2010, Reuters reported.
However, many economists, including the Russian Economics Minister Elvira Nabiullina, have rejected direct price control as a method to stabilize rocketing food prices. Nabiullina suggested during a one-to-one meeting with Prime Minister Vladimir Putin in September that the government could use other non-distortive means, such as market intervention from reserves, to keep prices down. Alfa Bank economist Natalia Orlova supports such views, adding that price control has never been an efficient way to keep down inflationary pressure. "Price control is a stop-gap measure meant to postpone the worst till later years," Orlova said. "As Russia enters the election season, government officials believe such measures could provide temporary relief by keeping inflation below ten percent. But would it last?" The best that can be expected, she said, is a worsening of Russia's trade relations with other countries. "For many companies, it will be no longer attractive to buy certain items from abroad and even in the domestic market," Orlova said. Ideally, Russia simply needs to increase the level of local competition in order to combat high prices, Orlova said. "One of the explanations for a high level of inflation in the country in recent years is that there is still a lack of competition in a number of markets," Orlova said. "In both the construction and consumer markets, for instance, there are only a handful of big players and these players are able to dictate prices."
Nadorshin, who heads market research at Jones Lang LaSalle, said placing price caps is hardly the most productive measures to contain rising inflationary pressure. "We have applied this method before in 2007 and again in 2008, and the effects on prices were quite negligible," Nadorshin said. "Price control in the past has also led to hoarding by farmers and there is no guarantee that farmers would not do so this time around."
Another hurdle before policymakers is that rising prices on staple foods is not peculiar to Russia, he said. Many developing countries including India, China, Malaysia and Indonesia are all facing similar problems. "If the problem is global, homebrew solutions can only exacerbate the situation," Nadorshin said. "Price caps can also negatively impact Russia's external trade as producers will surely look to external markets to sell their goods. As a free market economy, Russia will find it difficult to take unilateral measures that could impact its trade with other nations and invite retaliatory measures from them," he said. One way the government could hope to contain rising prices is to do all it can to improve supply, he said. "It is not too late to adopt measures that would improve farm productivity irrespective of the weather conditions that await us," Nadorshin said. "As a first step, the government should embark on a huge irrigation scheme and widen crop fields before the growing season kicks off."
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