Fiscal policy in Russia has collided with monetary policy
At the July meeting of the board of directors of the Central Bank they will discuss not only the key rate, but also growing inflation. As you know, the regulator initially set the goal of reducing it this year to 4-4.5%. It is now obvious that such a goal will not be achieved. According to preliminary data, in June inflation in annual terms rose to 8.75%. And then, as some economists predict, there will only be more. The regulator postpones the coveted goal of 4% to 2025. But why prices suddenly start to slow down is unclear.
According to the former first deputy chairman of the Central Bank, and now adviser to the head of the regulator, Ksenia Yudaeva, prices for goods are growing faster than previously expected, at the beginning of 2024. Actually, this is why the Central Bank adjusted its forecasts for annual inflation back in April, raising it to 4.3-4.8%.
However, May and June only accelerated prices on the shelves. And today, real inflation is twice as high as the “paper” inflation predicted by the Central Bank: by the end of June it will most likely be 8.75%.
High inflation expectations of the population, which are constantly rising, do not add to price stabilization. Last month they rose from 11.7 to 11.9%. And in annual terms it goes up to 14.4%. These factors put pressure on real price increases, as citizens try to spend their salaries as quickly as possible. Well, trade happily raises prices in response: it turns out there is effective demand…
In general, it turns out to be a vicious circle. The incomes of Russians have been growing for two years in a row, they are making more and more purchases and thereby driving up prices, as demand exceeds supply. So is it possible, in principle, to stop the growth of inflation during the period remaining until the end of the year? Is there such a mechanism? For an answer, we turned to the chief researcher at the Institute of Economics of the Russian Academy of Sciences, Doctor of Economic Sciences Igor Nikolaev.
“One fundamental reason has a serious impact on the overall situation,” says the economist. – The fact is that the policy pursued by the authorities today is a budgetary impulse. The country's economy is growing, the state has poured huge amounts of money into it. And this stimulates public demand, primarily consumer demand. The bet is on him. However, the downside of this approach is the acceleration of inflation. Fiscal policy is aimed at increasing demand. And monetary policy, for which the Central Bank is responsible, provides for limiting demand in order to bring down inflation. The regulator does not hide this. As long as there is such a “confrontation” between the two policies, the monetary policy from the Central Bank is doomed to lose. For this reason, inflation forecasts are being revised.
– As you know, the government planned to reach 4.5% in 2024, the Central Bank “gave” 4%. However, today, since the beginning of January, we have accumulated about 4% inflation. And compared to June 2023, it is more than 8.7%.
Let me remind you that last year inflation was 7.4%. For six months we have had a high key rate of the Central Bank, and despite this, in annual terms, inflation today is even higher — 8.7%. The regulator's tools are the key. The Central Bank keeps it high, but inflation depends not only on this.
– In fact, it grows both in the first and second half of the year. From January 1, prices usually increase. In the middle of the year, the tariffs of natural monopolies are indexed, which gives a further boost to inflation. In December, there are massive purchases for the New Year, which again leads to higher prices.
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– To some extent, this process can slow down the growth of inflation, but it can’t bring it down. Such miracles do not happen. Inflation also has an inertial property: if it accelerates, it is very difficult to stop it.
Against the background of indexation of housing and communal services tariffs, which affects everyone, vegetables are a very weak factor; they have a significant impact on the consumer price index they won’t.
– I think not, but it will remain around 9 percent, twice as bad as originally predicted. And what’s not very good is that it will be higher than last year. That is, price growth is accelerating.
— Non-food products will rise in price to a lesser extent than food. After all, you can refrain from buying them. But, as you know, you always want to eat. Demand for food remains guaranteed and prices remain high.