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Business / Finance

How to beat inflation

Banki.ru: themes of the day 07.02.2019 at 21:04

Banking and financial news on the website Banki.ru

The Government and the Central Bank said reducing inflation is one of the main tasks, however, its level is significantly ahead of forecasts of officials. Some methods of dealing with rising prices and why there are not all of them are effective?

inflation is What we need

In 2018, prices rose by 4.3%, according to the data of Rosstat. Even if skeptical of official statistics, this figure is significantly higher than the forecast that were previously announced by the officials. In the end, the recognized head of the Central Bank Elvira Nabiullina, this year "we are no stock by the level of inflation, which was earlier, and forecast a significant increase in inflation." Max, who voiced the regulator — 6%. Such price increases may be in the first quarter, but by the end of the year inflation should return to target target to 4%, and ideally should be even lower. According to Nabiullina, inflation, which reached in 2017, is "an absolute blessing" for consumers, as "not eaten wages and savings". This she said in mid-January at the Gaidar forum.

How to interpret the words of the head of the Bank of Russia about low inflation and why it may be good? After all, logically for ordinary citizens is primarily a reduction in living standards. However, for the economy, moderate inflation even useful. "Counting inflation a purely negative phenomenon is fundamentally wrong. Moderate price growth stimulates its development", — says the analyst of "seven rivers capital" Anastasia Sosnova. In moderate inflation, population tends to save money at interest to cover the inflation and simultaneously rising prices encourages people to spend money on goods that may become more expensive in the future. On the wave of consumer demand the business increases production, borrowing, create new jobs. "Inflation makes money work for the economy," concludes the analyst. According to Pine, for our country, the acceptable price increase is 3-5% per year.

At the same time, "zero inflation" and the more deflation (lower prices) can cause slowing of the economy. Due to the lack of demand for goods, there is a risk of overproduction and companies seek to reduce production. According to the Director of strategy IK "Finam" Yaroslav Kabakov, ideally inflation should not significantly deviate from the GDP growth rate. Given the fact that in recent years the economy in our country is growing by more than 1.5—2%, it turns out that prices should grow twice slower than that in plan of the Central Bank.

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However, consensus on what inflation is useful, economists have no. "Practice shows that the price growth in the year above 2% has a negative impact on the welfare of consumers", — says analyst "Discovery Broker" Andrei Kochetkov. The key question, according to him, the income of citizens: if the difference between the rich and the poor is continuously growing, the situation is not conducive to long-term growth of the economy. However, too rapid growth of welfare of citizens can be negative, driving the price growth. "In this situation is a breeding ground for inflation is already lagging productivity and low efficiency of the business," says the analyst.

the Rate of consumers

this is What the head of the Central Bank recently warned bankers at a meeting in Moscow "the forest", when talking about the growth of consumer credit. Last year the volume of loans to citizens increased by 22.8%, and the level of debt load is growing: now anyone working in Russia have Bank 199 thousand rubles. Loans Russians trying to solve the problem with income, declining several years in a row. Last year, they decreased by 0.2% and in 2017- by 1.2%.

where all this could lead, of course: the growth of non-payments, the increase in the number of bankrupt and, as a consequence, a crisis of the entire banking system. On the other hand, such disproportion between the dynamics of income and consumer demand (which is fueled by loans) leads to a further acceleration of prices. That is why the Central Bank chose the basic method of influence on inflation decrease/increase in the interest rate. Increasing the rate (plus the tightening of requirements for credit institutions), the controller makes the loans less affordable, not allowing to grow the demand for goods and services. "The previous model [based on consumer demand economic growth has exhausted itself," — said Elvira Nabiullina in August last year in an interview with The Wall Street Journal. In her view, economic growth requires investment, and this assumes low inflation.

Russia is not the only country where financial authorities use rate as a tool of inflation targeting. Her at different times used both developed and developing countries. As a recent example of Turkey, where last year due to outflows and the devaluation of the Lira, the Central Bank was forced to raise the base interest rate from 17.75% to 24%. In October there was registered a record high inflation of over 25%. "We can say that this method has long been a standard of monetary policy. This is a very effective tool for managing inflation," says pine. According to her, the stress tests also show the dependence of our economy from external shocks, resulting in the acceleration of inflation. "The policy of inflation targeting and flexible exchange rate allows to partially mitigate the effects of external shocks, including inflation," she explains.

However, it is believed that controlling inflation via interest rates is more suitable for countries with a developed economy and a high level of consumption. "In the economies, insufficient development of juggling rates can cause the debt load in the event of a sharp decline in interest rates or total inefficiency because of too high interest rates," said Kochetkov. Moreover, according to him, "play bet" is possible is not infinite, otherwise it is fraught with the growth of debt load of the population and business, and using tactics of quantitative easing (this at different times resorted to European and American Central Bank) it will create the risk of stagflation, when the deficit of the goods is accompanied by a continuous sharp rise in prices.

Economy and efficiency

fortunately, there are other methods of influence on inflation, one of which, for example, is the change in the monetary policy of the Central Bank, namely the sterilization of excess liquidity and the cessation of the issue of money. If the first in our country, all more or less well (for example, the placement of OFZ or Deposit auctions are held quite regularly), here off the printing press, the financial authorities seem not expect. For example, if we are to believe some economists, due to the issue funded the purchase of gold in Central Bank reserves. In the past year, we acquired 274,5 tons, the share of gold in international reserves exceeded 18.5%. Another article — the cost of pensions, which are financed from the national welfare Fund. As follows from the statements of the Ministry of Finance, in December to cover the deficit of the FIU from the national wealth Fund has sold a currency at 648 billion. In August 2016, the former Minister of Finance, the head of the chamber Alexei Kudrin in an interview to "Interfax" in detail described, how it works, the example of the then existing Reserve Fund (abolished and merged with FNB in the beginning of 2018). "The reserve Fund is kept in foreign currency accounts with the Central Bank and sold to the Central Bank. Central Bank to buy prints the money, it is monetary financing. That is why the Central Bank is forced to limit the influx of money into the economy through other channels. This is the rationale of deterrence of lowering rates," he said.

"the Gold we produced ourselves, which means that the purchase of gold, the Central Bank can issue money. In fact, due to this we have seen a substantial increase in the money supply in recent years", — agrees Andrey Kochetkov. Indicator of money supply, or M2, which includes deposits of citizens and companies and cash in circulation last year increased by 11%. According to the analyst, the dynamics of monetary growth is often correlated with the weakening of the ruble. "That is, with the strengthening currency, the Central Bank increases the amount of rubles in the financial system. Of course, these actions also stimulate inflation, increase since the supply of rubles," he explains.

Another method of dealing with rising prices — government regulation through privileges and preferences, as well as reducing the tax burden. From the point of view of recent tax innovations, the state still adheres to the opposite opinion: with the increase of VAT, excise taxes on gasoline, utilities some experts predict price growth above 7-8%. The government, however, tries to compensate for the negative regulation of prices for socially important goods, and also finances programs for the poorest citizens, but the overall picture does not change.

In conditions of growing tax burden businesses are less interested in expanding production. Much better to try to obtain income by rising prices. Especially if we are talking about companies-monopolists, who openly lobby for higher tariffs through the state.

Therefore, according to respondents, Banks.ru economists, the fight against monopolies is now the most effective way of struggle against inflation on a long term basis. Because, as a rule, increased competition is forcing businesses to think more about their own efficiency, cost reduction and what new products and services to offer consumers. This experience, our country is already there. Andrei Kochetkov, cites the example of agriculture. Tax incentives and devaluation of the ruble has allowed the Russian producers to oust foreigners from the shelves. Increasing supply from local producers — a factor which keeps prices down, especially in conditions of declining revenues, says the analyst. As a result, food inflation in Russia already is not as acute a problem as ten years ago.

albert KOSHKAROV, Banki.ru

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