Inflation - does anyone really know what's going on?

[Peter Morley (Russia Profile Discussion Group)]

[Disclaimer: I'm not an economist by training or inclination, so apologies for any factual mistakes on this front. In what follows I shall attempt to focus more on political aspects. However, all contributions from more economically minded group members are welcome. PM]

The hot domestic topic in Russian politics over the last few days has been inflation - and confusion has been reigning. Prime Minister Mikhail Fradkov has repeatedly insisted that the target of 8.5% inflation for this year must be adhered to, while conflicting estimates from the economic development and trade and finance ministries have put the figure at 9% or 10%. Fradkov was even moved last week to threaten sackings should the target not be met - which would be an extremely rare occurrence for Russia of the PM sacking cabinet ministers. Today's meeting was another rare occurrence - sessions are usually held on Thursday, but a combination of factors pushed this one forward, also sending the signal that the powers that be are extremely concerned about inflation. Meanwhile, figures put inflation for January and February at 4.3%, and German Gref has fingered sugar duties and panic salt buying as two key factors pushing it up.

What's going on here? Is the apparent confusion between different ministries just a sign of poor coordination, or does it betray a deeper lack of knowledge and/or confidence about what's really happening in Russia's economy? Then there's the issue of the stabilization fund - despite calls to spend it from some quarters, other figures have urged restraint as an anti-inflationary measure. What should be done with the stabilization fund? Is it rapidly turning into a lame duck? What role could, say, the Central Bank play? In short - how are we to make sense of the current stir of activity?

http://en.rian.ru/russia/20060314/44297494.html

http://en.rian.ru/russia/20060315/44334905.html

http://en.rian.ru/russia/20060315/44334988.html

http://en.rian.ru/russia/20060315/44338346.html

[Vlad Ivanenko]

Quoting Peter Morley: "how are we to make sense of the current stir of
activity?"

The simplest explanation is that Fradkov behaves as a regular military
officer - there is an order and whoever ignores it has to pay. Luckily,
it is not a complete economic nonsense. In late 1980s, when New Zealand
experienced high inflation, its central banker was charged with
reigning in inflation or to be dismissed. The threat worked ...

Russian situation is more complicated because apart from money growth
inflation is driven by structural changes. Thus, the central bank is
unable to cope with the problem alone. I find promising that Gref has
ventured to go into action - in my opinion, Russian inflation is
conditional on high incidence of monopolism. Potentially, active
anti-trust policy can help arresting price growth. Price competition is
weak, especially in regions. Gref's interference can help to curtail
retail price growth (like sugar or salt - main culprits today).

Vlad Ivanenko, PhD economics, Ottawa