ALEXEY VEDEV ASSESSED THE RATE OF INFLATION IN THE RUSSIAN FEDERATION TALKING TO RADIO “GOVORIT MOSKVA”
Inflation in Russia may reach from 18% to 23% at year-end of 2022, according to the central bank May monetary policy report. Alexey Vedev, Head of the Financial Studies Department of the Gaidar Institute and former Deputy Minister of Economic Development, spoke on Radio Govorit Moskva about factors influencing the inflation rate.
– Alexey Leonidovich, inflation in Russia could reach 18% at this year-end, though it is an optimistic estimate. The May report of the central bank noted that inflation would be between 18% and 23% at the end of the year. How does this figure describe the state of economy?
– This figure does not describe the state of economy very well. Firstly, the inflation is rather high, although I expect inflation to be above 20% at the year-end. There are several reasons for this. The first reason is by all means the ruble exchange rate instability. The stronger ruble that we observe, acts against inflation, however, recently the exchange rate was as high as Rb 120 per dollar and of course this has driven up inflation and accelerated price growth. The second reason is the public fear in various segments of the market: food and non-food. In other words, people are afraid that something will disappear and they demonstrate high demand, they buy up, and, of course, retail chains often inflate prices unjustifiably for such goods. And the third, probably the tiniest component, but still significant, is imported inflation. Inflation has accelerated in many countries worldwide, including partner countries fr om where Russia imports some types of food and in addition, we also import foreign inflation.
– From your point of view, what does the inflation rate depend on? Will it be 18% or 23% at the end of the year? Do you think it is likely to be somewhere in the middle?
– In my view it will be more than 20%, depending on what will counter inflation. This is what has been counteracting since 2015-2018, i.e. low consumer demand. I think the situation will get worse now. According to the Bank of Russia and the Ministry of Economic Development estimates that I partly agree, the GDP will fall by 10% or more. This means an inevitable drop in household incomes, growth in unemployment, which in turn is a contributing factor that limits demand. Last but not the least, I think inflation will slow down amid low demand.
– Alexey Leonidovich, another question about a possible slowdown in inflation. The same Bank of Russia monetary policy report says: "exchange rate pass-through into prices that has occurred to prices has largely been completed". In your view, is this true?
Yes, I hope so. I do hope so because right now we observe a rather peculiar strengthening of the ruble. There is supply in the form of sale of export proceeds and limited demand. As a result, people cannot safely buy foreign currency. Today, we observe the exchange rate of Rb 65 per dollar, which means that the ruble is strengthening considerably. However, is it market driven, is it free? It is difficult to say because our reality is a state of uncertainty, but if this is the opinion of the Bank of Russia, I am happy for them.
– The ruble appreciates against foreign currencies, but prices in the shops are reluctant to fall. What is the reason why prices do not roll back when the ruble rises?
– They are rolling back, in fact, this can be easily seen in imported goods, e.g. imported alcohol. First, they set insane prices, and now they scale down them, both directly and in the form of some kind of sales. This is a rollback. Prices are going down, which can also be seen in a number of other food imports. The issue is different, there are segments of non-food products, such as cars, wh ere supply is simply falling catastrophically. And of course, this is the reason to drive prices up.
– One of our listeners, a self-employed cargo shipping entrepreneur, wrote that there was no work for the second week running. He concludes that the Russian economy has stagnated. From your point of view, is it right to say that?
– That is certainly not the way to put it. The economy has not stagnated, but we should definitely expect a significant recession. It should be noted that right now we are still holding on to inventories. I agree with the Government, the central bank that usually the size of inventories in production is 2-3 months and just in June-July it will end and the economy will be forced to look for some other benchmarks.
– Thus, we have another phase ahead of us? Yesterday there were official estimates that restructuring of the economy will be over by the middle of next year. In your opinion, can it be restructured in a year?
– No, of course not. It will take considerably more time. In June, July, partly in August, we will see how severe the current challenges are amid the sanctions’ regime. Moreover, some kind of global restructuring will take 5, 10, 15 years. It is clear that it will not take one year. However, most importantly, we will understand the depth of the economic problem not now, but only by the end of summer.
– This figure does not describe the state of economy very well. Firstly, the inflation is rather high, although I expect inflation to be above 20% at the year-end. There are several reasons for this. The first reason is by all means the ruble exchange rate instability. The stronger ruble that we observe, acts against inflation, however, recently the exchange rate was as high as Rb 120 per dollar and of course this has driven up inflation and accelerated price growth. The second reason is the public fear in various segments of the market: food and non-food. In other words, people are afraid that something will disappear and they demonstrate high demand, they buy up, and, of course, retail chains often inflate prices unjustifiably for such goods. And the third, probably the tiniest component, but still significant, is imported inflation. Inflation has accelerated in many countries worldwide, including partner countries fr om where Russia imports some types of food and in addition, we also import foreign inflation.
– From your point of view, what does the inflation rate depend on? Will it be 18% or 23% at the end of the year? Do you think it is likely to be somewhere in the middle?
– In my view it will be more than 20%, depending on what will counter inflation. This is what has been counteracting since 2015-2018, i.e. low consumer demand. I think the situation will get worse now. According to the Bank of Russia and the Ministry of Economic Development estimates that I partly agree, the GDP will fall by 10% or more. This means an inevitable drop in household incomes, growth in unemployment, which in turn is a contributing factor that limits demand. Last but not the least, I think inflation will slow down amid low demand.
– Alexey Leonidovich, another question about a possible slowdown in inflation. The same Bank of Russia monetary policy report says: "exchange rate pass-through into prices that has occurred to prices has largely been completed". In your view, is this true?
Yes, I hope so. I do hope so because right now we observe a rather peculiar strengthening of the ruble. There is supply in the form of sale of export proceeds and limited demand. As a result, people cannot safely buy foreign currency. Today, we observe the exchange rate of Rb 65 per dollar, which means that the ruble is strengthening considerably. However, is it market driven, is it free? It is difficult to say because our reality is a state of uncertainty, but if this is the opinion of the Bank of Russia, I am happy for them.
– The ruble appreciates against foreign currencies, but prices in the shops are reluctant to fall. What is the reason why prices do not roll back when the ruble rises?
– They are rolling back, in fact, this can be easily seen in imported goods, e.g. imported alcohol. First, they set insane prices, and now they scale down them, both directly and in the form of some kind of sales. This is a rollback. Prices are going down, which can also be seen in a number of other food imports. The issue is different, there are segments of non-food products, such as cars, wh ere supply is simply falling catastrophically. And of course, this is the reason to drive prices up.
– One of our listeners, a self-employed cargo shipping entrepreneur, wrote that there was no work for the second week running. He concludes that the Russian economy has stagnated. From your point of view, is it right to say that?
– That is certainly not the way to put it. The economy has not stagnated, but we should definitely expect a significant recession. It should be noted that right now we are still holding on to inventories. I agree with the Government, the central bank that usually the size of inventories in production is 2-3 months and just in June-July it will end and the economy will be forced to look for some other benchmarks.
– Thus, we have another phase ahead of us? Yesterday there were official estimates that restructuring of the economy will be over by the middle of next year. In your opinion, can it be restructured in a year?
– No, of course not. It will take considerably more time. In June, July, partly in August, we will see how severe the current challenges are amid the sanctions’ regime. Moreover, some kind of global restructuring will take 5, 10, 15 years. It is clear that it will not take one year. However, most importantly, we will understand the depth of the economic problem not now, but only by the end of summer.