Why inflation in Russia is growing at a record pace

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According to a survey by the Central Bank of the Russian Federation “Inflation expectations and consumer sentiment” in January 2019, based on the materials of the survey of “old,” inflation expectations of the Russians for the next 12 months increased in comparison with December by 0.2% – to 10.4%, and for the first time from January 2015, exceeded the level of inflation. “Thus, the survey participants predict higher future inflation than are watching now.”, – stated in the message controller.
This was largely caused by the increase in actual inflation, because inflation expectations are the most sensitive to growth of prices for goods and services “FMCG”, which constituted a significant share in the family budget, for example, food and gasoline and utilities. Along with this marked increase in inflation expectations from the business community, which was primarily associated with an increase in the VAT rate from 18% to 20% and the negative dynamics of the ruble, rising excise taxes and tariffs, as well as wage indexation, at least at the level of last year’s inflation (+4.3 per cent).
The Bank of Russia to 2019 forecasts inflation in the range of 5.0-5.5%, although the head of the Central Bank Elvira Nabiullina admitted that at the peak in March-April and annual inflation may exceed these figures and even reach 6%, whereas the official forecast of the government of the Russian Federation and does is 4.3%.
People’s expectations about inflation remain at an elevated level since the middle of last year due to the influence of factors such as the weakening of the ruble, associated in particular with increasing sanctions pressure, an abrupt increase of fuel prices, supported by high oil prices, increasing the retirement age, as well as proactive steps businesses in anticipation of rising VAT.
Against this background, quite revealing is the data on the growth of consumer prices, recently granted by the Federal Agency of state statistics. So the consumer price index in Russia in January 2019 rose by 1% in comparison with December of 2018, when prices rose by 0.8%. The mark of one percent, the index hasn’t updated since January of 2016, according to Rosstat. A significant appreciation was observed for most of the observed types of fruits and vegetables, according to statistics.
Overall, food prices rose 1.3 percent by December and 5.5% by January 2018. Nonfoods grew in price by 0.6% and 4.5%, while services rose in price by 1.1% and 5%, respectively. While yoy inflation in January accelerated sharply, reaching 5% after a 4.3% compared to December 2018. It should be noted that the historically minimal statistical benchmark of inflation in Russia today is the level of 2017, when it amounted to 2.5%.
According to many economists, except for a seasonal rise in price of goods and services the main factor of acceleration of inflation has become controversial decision of the Russian government, on whose initiative a decision was made to increase from 1 January 2019 VAT by 2%. At the same time, improvements were made to the excise taxes on motor fuel, tobacco, alcohol and cars, which entailed the growth of tariffs for utilities and public transport. The result of this explosive growth of inflation in January 2019 to 1% against 0.3% and 0.6% in 2018 and 2017, respectively.
In these circumstances, Russian businessmen have to do is not a simple choice between raising prices to maintain profits, or to pay for customer loyalty out of your pocket, which is more typical for companies focused on end consumer demand and limited financial capacity of buyers. According to our estimates, given the already large burden on business, most businesses will be forced to pass the increased costs on the shoulders of the consumer.
In this context, it becomes very relevant the so-called downsizing popular marketing ploy, it is widely entrenched in the Russian market in recent years. Downsizing is decreasing the quantity of a product in a package without changing the price. In a literal translation from English, “downsizing” means a reduction in size. Downsizing is a kind of “camouflage” of higher prices for products, based on negligence and the habituation of consumers to the product.
In fact – that’s not quite fair, you can say “on the verge of deception,” the practice of obtaining benefits to the manufacturer, carried out in the framework of the laws, since it technically does not impose liability on the seller by reason of the carelessness of the buyer. For this reason, downsizing has been in Russia all products and manufactured goods in industrial packaging, leads us involuntarily to pay a higher price for less weight and volume, thus causing another round of inflation. Factors that can change the situation for the better is not observed. Most likely in the first half of the year inflationary expectations of the Russians can still grow, and the policy of belt-tightening will continue at least until the end of 2019.
Gennady Popov,