Inflation in Russia began to decline, but the financial authorities of the Russian Federation disagreed in assessing the situation with prices. The Ministry of Economic Development considered that there are already signs of a deflationary spiral unwinding. The Central Bank refused to consider the current price situation in Russia as deflation. What exactly can be considered deflation, is this process favorable for consumers, how does it affect the situation in the economy, and whether it is necessary to fight it – Izvestia found out.
Divided in opinion
In mid-June, Russian Economic Development Minister Maxim Reshetnikov expressed concern that Russia was slipping into a deflationary spiral. Therefore, he hopes that the Bank of Russia will continue the trend of reducing the key rate.
Analysts of banks and financial companies also suggested that for the first time in the history of modern Russia, deflation could occur in June. They predicted that the cost of goods in monthly terms could be reduced by 0.5%, which happened. A number of experts admitted that in 2022 deflation will be from June to August.
However, the Central Bank refused to consider the current situation with prices in the Russian Federation as deflation. According to Alexei Zabotkin, Deputy Chairman of the Bank of Russia, it is inappropriate to talk about deflation based on weekly price changes in Russia. In order for the economy to develop a deflationary trend, there must be two preconditionshe emphasized.
First, very low inflation expectations should form, which make the population and business expect further price reductions and thereby reduce their demand. “Our current situation is that inflation expectations have risen sharply as a result of the events of this spring,” Zabotkin said. The second prerequisite he called the approach to zero growth rates of the money supply in the economy. In Russia, according to May data, this figure was 16.2% year-on-year.
What is deflation
Deflation is an increase in the real value of money and a decrease in the general level of prices for goods, works and services. Demand from buyers for goods or services decreases, the cost of products decreases.
Economists state that over the past two months, inflation in Russia has really started to decline, which has had a positive effect on consumer demand.
According to Rosstat, in June prices fell by 0.35% compared to May values.
“Price reduction was mainly due to cheaper goods, and food products fell in price more than non-food products, while services rose in price compared to the previous month,” explains KSP Capital analyst Mikhail Bespalov.
Double edged stick
Deflation, on the one hand, is favorable for the consumer: more goods and services can be purchased for the same nominal amount of funds. Nevertheless, as analysts emphasize, the situation should be considered in the context of what is happening in the economy as a whole: what are the trends in unemployment, what is with the level of wages. The characteristic signs of deflation are both a reduction in the wages of workers and an increase in the number of unemployed. All this worsens economic conditions.
“Deflation can be useful when companies reduce production costs, increase efficiency, and in the struggle for market share, manufacturers reduce prices without reducing production volumes and jobs,” analysts at Freedom Finance say.
However, if deflation is due to low demand (due to consumers’ uncertainty about the future and the desire to accumulate funds and reduce consumption), production and business also react to a similar situation.
— There is a reduction in investment, production plans are being adjusted downward, there is a reduction in workers and cuts in wages, which leads to increased competition in the labor market and can lead to an increase in unemployment. Then deflation is dangerous, because today you have to pay for the positive effect in the form of the opportunity to purchase a product or service at a reduced price with tomorrow’s well-being and economic growth prospects, explains Mikhail Bespalov from KSP Capital.
high base effect
In the current situation, the majority of analysts polled by Izvestia did not see the beginning of a deflationary trend. Rather, the excessive strengthening of the ruble and the effect of a high base, which formed after the shock events of the first quarter, worked. Prices were correcting after too rapid growth in March, when a number of goods rose in price by 30-40%. Thus, after the peak price values of early spring, a natural pullback occurred.
“The decline in prices is also caused by seasonal factors (primarily for vegetables, fruits and other agricultural products) and the effect of the strengthening of the ruble,” says Maxim Biryukov, Senior Analyst at Alfa Capital.
— In addition, in March 2022, demand in Russia was at a record high. Citizens bought goods for the future, but it is impossible to make purchases for life. Therefore, now stocks are running out, and the population is returning to the usual level of consumption.– adds Gulnara Ruchkina, Dean of the Faculty of Law of the Financial University under the Government of the Russian Federation.
Analysts point out that with the risks of deflation in Russia, a depreciation of the ruble is enough now. The Ministry of Finance has already resorted to “verbal interventions”, which made it possible to weaken the overly strong national currency: since July 1, it has fallen in price by 10%. And if necessary, there will be direct interventions through the purchase of currencies of friendly countries.
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