The purpose of this report is to show what has been happening to the rate of inflation of Russia for the past 18 to 20 years. After investigating & looking at last year (2006) results, it can be stated with confidence that the country’s deepest economic recession of its transition to a market economy has
been completely overcome. Inflation in 2005 was about 9%, its lowest level in 15 years. Moreover, from 2000 to 2005, consumer demand internally has grown by 12% each year, which is a good sign of a modern economy.
Russia possesses ample supplies of many of the world’s most valued natural resources. However, most such resources are located in remote and climatically unfavorable areas that are difficult to develop and far from Russian ports. For nearly sixty years, the Russian economy and that of the rest of the Soviet Union operated on the basis of a centrally planned economy. Russia’s economy is difficult to be measured in comparison to other countries due to its high rate of inflation and price-fixing for certain utilities.
Inflation refers to the general & sustained rise in the level of prices of goods & services. The rate of inflation is measured by calculating the percentage price increase in goods & services, usually over a year. Economists agree that the main cause of inflation is ‘too much money chasing too few goods’. This means people are able to increase their spending on goods faster than producers can supply the goods they want to buy. The rise in spending causes an excess of aggregate demand for goods & services & their prices are forced upwards.
* The costs of inflation to the economy
· Many pensioners are on fixed pensions so inflation reduces the real value of their income year on year.
· Inflation usually leads to higher nominal interest rates that should have a deflationary effect on GDP.
· Inflation can also cause a disruption of business planning – uncertainty about the future makes planning difficult and this may have an adverse effect on the level of planned capital investment.
· Some economists say that inflation causes unemployment. As prices rise, people can’t afford to buy so many goods & services & so demand falls. In addition, some people save more in times of high inflation to protect the real value of their savings. This again means less spending on goods & services. As a result firms may cut their output & make resources, including labour, unemployed.
* Inflation in Russia
Two fundamental and interdependent goals –macroeconomic stabilization and economic restructuring — marked the transition from central planning to a market-based economy (In 1990). Opening domestic markets to foreign trade and investment, thus linking the economy with the rest of the world, was an important aid in reaching these goals. In 1992, the first year of economic reform, retail prices in Russia increased by 2,520%. A major cause of the increase was the decontrol of most prices in January 1992, a step that prompted an average price increase of 245% in that month alone. In October 1991, a program of radical economic reforms was established which laid out a number of macroeconomic policy measures to achieve stabilization. It called for sharp reductions in government spending, targeting outlays for public investment projects, defense, and producer and consumer subsidies. The program aimed at reducing the government budget deficit from its 1991 level of 20% of GDP to 9% of GDP by the second half of 1992 and to 3% by 1993. In the monetary sphere, the economic program required the Russian Central Bank to cut subsidized credits to enterprises and to restrict money supply growth. The program called for the shrinkage of inflation from 12% per month in 1991 to 3% per month in mid-1993. By 1993 the annual rate had declined to 240%, still a very high figure. In 1994 the inflation rate had improved to 224%.
Trends in annual inflation rates mask variations in monthly rates, however. In 1994, for example, the government managed to reduce monthly rates from 21% in January to 4% in August, but rates climbed once again, to 16.4% by December and 18% by January 1995. Instability in Russian monetary policy caused the variations. After tightening the flow of money early in 1994, the Government loosened its restrictions in response to demands for credits by agriculture, industries in the Far North, and some favored large enterprises. In 1995 the pattern was avoided more successfully by maintaining the tight monetary policy adopted early in the year and by passing a relatively stringent budget. Thus, the monthly inflation rate held virtually steady below 5% in the last quarter of the year. For the first half of 1996, the inflation rate was 16.5%. However, experts noted that control of inflation was aided substantially by the failure to pay wages to workers in state enterprises, a policy that kept prices low by depressing demand. During January-July 1998, the pace of inflation slowed more, with cumulative CPI growth over the period declining to only 4.2 percent, compared to 9.6 percent in the year-earlier period. The slowdown in inflation in the first half of 1998 was due to a strict monetary policy adopted as a result of the deepening financial crisis.
In 2001, the reduction in inflation was mostly due to a seasonal decline in food prices. Higher inflation in 2005 than in 2004 was due in large part to increases in administered utilities prices early in the year. The primary source of inflationary pressures in Russia remains the huge balance of payments surplus. As oil prices grow, so do the potential pressures for inflation or nominal currency appreciation.
Year Inflation %
Contribution of Key Factors to Inflation in 2003 & 2004
* Inflation in the future
There’ll be a considerable increase in inflation forecasts; the reason for this will be a substantial jump in tariffs of natural monopolies as of 2008 (their growth rate will be 50-100% higher).
2007 2008 2009 2010
Inflation CPI% 8.5 8 7.5 7
A strong expansion in internal demand continues to drive economic growth in Russia, although a slowdown in most manufacturing and tradable sectors is becoming increasingly visible. Higher-than-expected inflation in early 2006 has motivated discussions of a new package of anti-inflationary measures by the government and Central Bank. Russia currently has only limited instruments for reducing core inflation. Primary among these instruments are levels of government spending (as opposed to accumulation in the Stabilization Fund), exchange rate policy, and other limited means of the Central Bank for regulating liquidity. When a larger internal bond market finally develops, the hand of the Central Bank will be strengthened considerably for the conduct of anti inflationary monetary policy.
Russia’s lasting economic growth has served as the foundation for achieving the level of inflation in 2006. The government’s efforts to restrict the money supply and the Stabilization Fund’s efforts to sterilize it have also had a positive effect. However, there are still reserves left for curbing inflation in 2007. Russian commodity producers’ competitive potential has not been fully taken advantage of.