The "lowest ever" inflation: FBK Economic Club experts' opinion

According to the Russian State Statistics Service (Rosstat), the country saw a 4.3% inflation in 2016, an all-time low in the history of its measurement. What consequences will there be for the Russian economy? What opportunities does low inflation create for development? Leading Russian experts answered these and many other questions at a meeting of the FBK Economic Club.   



Igor Nikolaev, Head of the FBK Strategic Analysis Institute, noted that in 2016-2017 inflation was only half as high as in the corresponding periods a year earlier. At the same time, there is no rise in the real financial incomes of the population. "Real financial incomes (i.e. incomes less inflation" declined by 4% in February 2017, while inflation was a mere 0.2% over the same period. The decline in income, in its turn, affects the purchasing power and the domestic market volume negatively," the expert pointed out. In his opinion, there are no grounds to distrust government statistics, but according to the FBK SAI's experience in studying alternative inflation, inconsistencies in certain fundamental indicators may imply that the actual inflation level is somewhat higher than official reports show. Mr Nikolaev added that the Strategic Analysis Institute's forecast predicted that inflation would keep steadily low throughout at least another six months unless the Central Bank completely changed its policy and dropped the key refinancing rate, currently at 9.75%, or the oil prices grew dramatically resulting in a shift in the national currency's exchange rate.

Evgeny Gavrilenkov, an economist and a Matrix Capital partner, pointed out that inflation level assessment was subject to the impact of situational factors. Furthermore, along with consumer inflation there is also inflation of manufacturer prices considerably impacted by commodity stock fluctuations and some other factors. The high key rate is impacting the economy negatively, and the Central Bank is having an excessively tight monetary policy due to the high level of inflation expectations among both manufacturers and consumers, the expert said. 



Nikolay Kondrashov, Leading Expert of the Development Center, NRU HSE, expressed an opinion that no subjective approach could be allowed when assessing the level of inflation. He believed that existing data for the real disposable population income didn't factor in the strengthening of the national currency. According to the expert's estimate, the rouble was currently at least 10% overvalued compared to a national currency rate corresponding to the fundamental macroeconomic indicators. As a consequence, real incomes are higher than Rosstat says, whereas the official estimates of the inflation rate are rather precise. Meanwhile, the expert believed that the turnaround in the inflation targeting policy had considerable risks: a simultaneous decrease in the key rate, a higher capital outflow due to the suspension of carry-trade transactions, and a real revenue rise could together result in dramatic inflation growth and push the economy back to the situation of 25-30 years ago, during "the turbulent 1990s."
 
Marina Krasilnikova, Head of the Revenue and Consumption Department at the Levada Centre, spoke in detail about the social aspect of inflation. According to the polls regularly held by the centre, the public's inflation expectations are declining: the share of people thinking that prices will rise slower or decline exceeds the percentage of those believing that they will grow. There are about 30% of the "optimists" and only around 10% of the "pessimists". The expert added, however, that the population's consumption expectations were not demonstrating any growth. One can be fairly confident that people are planning to spend less, and a rise in financial incomes will not make consumption grow, change the expense structure, or revive domestic demand.

The FBK Economic Club experts agreed that low inflation wasn't a target in itself. If the Central Bank keeps its refinancing rate low and its monetary policy generally tight, it's hard to expect GDP growth. At the same time, a sharp decrease in the key rate might cause a higher inflation rate, which is harmful for the economy as well.

The experts believed that the goals to be set were increasing the real incomes of the population and growing effective domestic demand.

Stable financial indicators ― the key rate, the rouble exchange rate, and the inflation level ― will help attain those goals rather than the opposite, the experts said.

The FBK Economic Club is a unique discussion platform allowing the mass media to meet well-know economists, politicians and officials for a professional discussion of a broad range of economic issues. The Club also delivers presentations of FBK's analytical reports.

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