Russia Imposes Inflation-Driven Price Controls: Will Use Price Caps On "Socially Important" Commodities

Russia has just announced it would proceed with price caps on a variety of foodstuffs, from buckwheat, to potatoes, assorted fruits and vegetables and all other commodities it deems "socially important" accoding to Russian newspaper And so the big margin crunch goes up several orders of magnitude, as companies, desperate to pass through surging input costs, but prohibited from raising selling prices, are forced to eliminate any and all overhead, most certainly including such trivialities as labor, in order to stay in business. More importantly, experts now predict that full year inflation in Russia will hit double digits. Just in the first 17 days of January, inflation hit 1.4%, or 9% annualized (according to gazeta... our calculation indicates a notably higher number but readers get the idea). Luckily, Russia does realize just how futile this task of price controls is: "as soon as we introduce price controls, once a deficit, the product disappears from the market, followed by an even higher rise in prices on the shadow, not covered by official supervision, market." And so a vicious circle in which high prices beget even higher prices begins. But don't worry - this could never happen in the US: see Americans only eat gold and their iPods. There is therefore massive slack in the food vertical, and, furthermore, as Steve Liesman explains so well today, a 100% rise in the price of wheat would only translate to a 10% hike in the price of bread. What happens to the other 90% (which incidentally annihilates the producer's margin but Steve didn't get to page two in that particular Inflation for Dummies book), is apparently unclear to the CNBC head economist.

From, google translated:

Government has the right to limit the price for a period not exceeding 90 days. It's allowed to do in the event that within one month increase in retail prices for these products is 30% or more in one or more regions.

Relevant amendments have been adopted into law on trafficking in the past year, but authorities have never exercised their right. Although, for example, buckwheat because of the drought has risen over the past year 3 times. " It was inappropriate to "impose price caps on buckwheat in the autumn, when the harvest had not yet been finalized, said the official. " In addition, it was expected that the situation with buckwheat will be more favorable in view of admission of the Siberian harvest. But manufacturers and trade recorded a high level of prices, since many farms lost to the drought, the fall harvest - and wanted to compensate, where possible, "- noted the deputy minister.

A marked increase in the prices of foodstuffs began in the second half of last year, and to stop it have not yet succeeded. " the risk of significant price increases this spring and the grain - and, hence, the bread and meat for the group behind him, "- admitted Klepac.

As a result, inflation is once again at risk to go beyond the framework outlined by the Government. In 2010 it was 8,8% in the original forecast of 6-7%.

Inflation forecast for 2011 - 7%. But in January it can perform almost a third of the annual plan. According to the Ministry of Economic Development, which sounded at the end of last week, the head of department Nabiullina, consumer price inflation for the first month is 2,1-2,3%. According to the Federal State Statistics Service, from 1 to 17 January, inflation reached 1.4% ( in annual terms - 9%).

The Central Bank is also concerned about the acceleration of inflation. " I feel that in the first quarter we will see an acceleration of inflation. Perhaps the situation will change in the second quarter, I hope so "- said the first deputy chairman of the Central Bank Alexey Ulyukayev, speaking at a conference at Deutsche Bank in London on 21 January.

By mid-year inflation could reach double digits on an annualized basis, said Ulyukaev.

Double-digit inflation for the year - it's real, I agree the head of department of strategic analysis FBK Igor Nikolaev. " Our forecast for 2011 - 9% "- said the head of the Center for Macroeconomic Research of BDO in Russia Elena Matrosov. " My prediction is within 11% "- said Professor of Economics, New Economic School (NES) Konstantin Styrin.

Methods of fighting inflation are well known: not to increase the money supply, to limit profitability of financial investment, slow growth in demand, transfer the practice leader goskonsaltinga Alexei Kalinin. And besides, to restrict the growth rates, enhance and stimulate product offering and is not strongly restrict imports, adds Matrosov.

But in the current selection of tools is limited.

Sterilization of money to which the government actively resorted to crisis, to fight inflation, now threatens to undermine economic growth, which is already weak.

" Sterilize the money supply, as was done in the 2000's, is problematic. First, the deficit budget for 2011 has already been approved. Secondly, the surplus could be achieved either by raising taxes or reducing spending. And one, and another would reduce aggregate demand and would have slowed the recovery growth ", - said Styrin.

Involved will be primarily monetary policy: inflation will hamper the efforts of the Central Bank on monetary and foreign exchange markets, said Kalinin.

But this method of inflation control as the introduction of maximum prices for food, experts estimate unambiguously negative: it could lead to shortages or poor quality goods.

' Not only is the practice of the Soviet Union, with its empty shelves, but some experiments governors early 1990-ies have shown: "as soon as we introduce price controls, once a deficit, the product disappears from the market, followed by an even higher rise in prices on the shadow, not covered by official supervision of the market " Reminds Kalinin. More sensitive measure would subsidize producers and sellers, adds Styrin. But the practical implementation of such decisions in the Russian context is problematic, experts say.

"Do not limit price, and nurturing a competitive environment, elimination of administrative barriers to business - that's the best solution to the problem "- reminds Matrosov. But such work should be conducted regularly, experts say, but not when prices are getting out of control.