An example of a baker, a butter maker and a security guard
During the years of perestroika, at a lecture by a well-known economist, I heard the simplest explanation of inflation. “Imagine a society of three people,” the lecturer said, “one bakes bread, another makes butter, the third guards these two. At the end of the month, everyone receives 100 rubles for their work, which they use to buy bread and butter. How much total do you think? he asked the audience.
Someone from the audience immediately answered: 200 rubles, because that's how much this bread and butter cost the society. But the lecturer did not agree: no, for all 300 rubles that buyers have. And then he complicated the task: “Now imagine that conflicts began to arise between them, and a boss was needed, which was chosen as a buttermaker, freeing him from his previous duties while maintaining earnings. And at the end of the month, having received 100 rubles each, they again go to the market, where there is no longer butter, but only bread. For what amount? This time, the wiser listeners answered correctly: for the same 300 rubles.
The lecturer also explained to us why the standard of living in the USSR is much lower than in the USA. “They,” he said, “for every two people who live by selling their goods or services to other people, there is one who lives off the taxes levied on these two — an official or military, police, anyone who works exclusively to the state. Pensioners are not included in this list — they get what they put aside while they worked. In our country, this ratio is traditionally the opposite — one to two. True, pensioners are also among these two, since pensions are paid from the budget.”
Later, I learned that in a market economy, both consumer prices and the processes of their change (called inflation if prices rise, or deflation if they fall) depend on the ratio of effective demand for goods and services to their supply. If the amount of money in the population grows faster than the amount of goods and services on the market, inflation is inevitable, which is called structural. Its “ban” is fraught with empty shelves and closed service points. When the market supply grows faster than consumer income, entrepreneurs, in order to avoid overstocking and downtime, reduce prices and arrange sales.
The second most important factor on which prices depend is the cost of production and circulation of goods, the provision of services. When the market or some part of it faces rising prices for raw materials, components, energy, transportation, borrowed money, labor, the final product rises in price, accumulating all additional costs. This is called cost-push inflation.
What has happened in the consumer market with demand, supply and costs in recent years, what is happening now and what to expect?
To understand this, let's first imagine, following the model of the mentioned model, but in accordance with the Rosstat data on the composition of the population and incomes of citizens and the budget, a society of 48 people, consisting of four groups. In the first 18 workers, each month delivers one product to the market — a product or service with the same cost, consisting of two-thirds of wages and one-third of taxes and fees received by the budget of society. There are 6 people in the second group, they perform the duties of managing and ensuring the safety of society, their work is paid from the budget at a price one third higher than the salary of workers from the first group. In the third group there are 12 pensioners who receive amounts from the budget equal to a third of the salary in the first group. The fourth group also has 12 people, these are children and students who do not have their own income.
In such a model, the ratio of the number of independent citizens earning on the market and those who live off the budget, including pensioners, is one to one. This is twice as good as we had in the late 1980s, but does not allow comparison with the «two to one» that was then in the United States. According to the model, two-thirds of the society's budget revenues are provided by taxes and fees from the first group, another third comes from rent — payment for the use of natural resources owned by society, its size strongly depends on the global economic situation. Budget expenditures consist of three-quarters of payments to those who work for the state and pensioners, and the remaining quarter is distributed among other tasks of society, such as increasing pensions, developing infrastructure and human capital, and scientific research. Inflation is not included in the model, but it can be estimated as a result of changes in the basic parameters.
In 2016-2019, this was approximately the case. The consumer price index (CPI) was then quite moderate, averaging 104.3 percent, and reflected mainly cost-push inflation. And even when shopping and service centers, catering outlets, and industrial enterprises were massively closed in 2020 to protect against the coronavirus pandemic — that is, the supply of goods and services significantly decreased — the CPI almost did not grow. Since the incomes of employees of organizations closed for quarantine were simultaneously decreasing and large groups of the population were self-isolating, which no less significantly reduced demand.
But the following year, when restrictions began to be lifted and the first fright of citizens passed, their demand, postponed for the duration of these difficulties, “shot” at the supply that was not yet fully strengthened, almost doubling the increase in consumer prices, to 8.4 percent.
We didn't even have time to exhale properly after the pandemic, when the SVO began, and already in March the CPI took off, which practically stopped at the level of 11–12 percent since April. Clearly, the March surge was caused by rush demand, but if that were the only reason, demand should have fallen below normal in the future, dragging prices with it. I see two reasons why this did not happen.
The first is on the supply side: our model shows that if one of the 18 employees of the first group was transferred to the second group for the needs of the NWO (I think this is close to the truth), then the resulting decrease in the number of products on the market and the increase in the total income of the population should have led to to an increase in the average price of a product by 7 percent.
The second reason is on the demand side: last year, the average salary in Russia increased by 14 percent (by 6 percent in 2021). This is so much greater than the change in the physical volume of goods and services on the market that it can justify a larger increase in prices than 12 percent. The fact that part of consumers' income does not enter the market, but settles in bank accounts and deposits, does not fundamentally change the picture, since banks transfer these funds of some people into loans to other people, increasing demand in the consumer market.
In the first half of this year, price growth slowed down, but consumers are anxious, and they have plenty of reason to worry. The total increase in wages pulls up not only consumer demand, but also the cost of production. Other factors of cost inflation also became more active — the cost of currency, credit, and logistics rose sharply. And the growing deficit of the budget system is unlikely to allow it to maintain market supply on the same scale with government orders, subsidies and tax incentives.
This means that in the short term we should expect inflation to accelerate. And what worries me most is how families will cope with it, where one or two working adults have several dependent children, especially if these adults have low-paid jobs.
Such families, as a rule, are part of the 10 percent of Russian citizens with the lowest incomes. According to the Federal State Statistics Service for 2021, this part of the population consumes meat, fish, dairy products and vegetables one and a half times, and fruits — half as much as citizens with average incomes for the country. It is unlikely that middle-income citizens overeat much, which means that those at the very bottom of the income line are undernourished, and some are starving.
Of course, price increases, especially for products of the first price range, the cheapest , will be constrained not only by a shortage of funds from consumers, but also by the authorities and retail chains. However, both understand that empty shelves are worse than high prices, and if it comes to this, a forgotten black market with even higher prices will revive. Therefore, they will turn a blind eye not only to the already familiar shrinkflation (such as “nine eggs” instead of a dozen), but also to contain the growth of their costs by manufacturers by reducing the cost of raw materials, technologies, and packaging in order to maintain the price of the product. Given a moratorium on government oversight of the consumer market a year and a half ago, this can be done with near impunity, so don't be surprised to taste familiar foods or get stomach upset. And do not complain anywhere — it is unlikely that someone will be able to help you, it is better to look for products and manufacturers that you can still trust.