Prices in Russia are rising faster than the Economy Ministry expects

Fighting inflation has turned into a national sport for the Russian authorities. Unlike many other countries, which readily resort to inflation to boost their sluggish economies, Russia sacrifices growth to curb inflation. However, experts say the government is looking in the wrong place: it is not the prices that have to be attacked, but the reasons for inflation. The worst is yet to come, they warn.

According to preliminary data, inflation stood at between 3.4 and 3.6 percent in January and February 2008, up from 2.8 percent in the same period last year and making the 8.5 percent target for 2008 more unrealistic. Meanwhile, economy officials have adopted new rhetoric, Deputy Economy Minister Andrei Belousov saying the inflation target could be achieved if food prices didn’t surge again.

But economists insist that the government’s inflation target is unrealistic anyway, with world food prices expected to rise further, spurred by climbing energy prices. “Food prices rises are prompted by the launch of biological fuel projects, which cannot be stopped,” Alexander Yakuba, chief analyst at CrossMediaCommunications, told RBC Daily.

Amid global economic troubles raw material markets attract speculators. As a result, gold, platinum, wheat and oil are rising in price. Some experts say Washington’s policy of pumping cash into its ailing economy to bring it out of crisis fuels inflation, affecting other world economies. “For a long time, the US had inflation at 2 percent. Last year, it had 4 percent, and China reported 6.5 percent following a period of deflation,” Yakuba noted. He said the situation was not yet critical but problems could arise if high inflation coincided with a global economic collapse.

Some analysts raised their inflation forecasts for 2008 to 15 percent, following the publication of the latest inflation data, but some are more optimistic. “We left our forecast unchanged at 10.8 percent. For February, we estimate inflation at 1.3 percent,” said Denis Popov, an analyst at ATON. He criticized the government’s policy of curbing prices as unreasonable arguing that aggressive economic growth implies inflation of between 8 and 15 percent.

However, it is ordinary people who bear the brunt of the aggressive growth. First of all, they lack adequate investment tools. With inflation so high, even maintaining one’s savings becomes a challenge, to say nothing of increasing them.

While the government is helpless against rising world food prices, it can help with competition on the domestic market. Indeed, low inflation in developed economies is largely the result of strong competition. But things are different in Russia, where most markets are dominated by monopolies. For example, price rises in the housing and utilities sector alone account for about 30 percent of overall inflation. This seems to be a problem that won’t be solved any time soon, and the Russian economy will be plagued by inflation as long as competition remains low.

Source: RIA RosBusinessConsulting