Backdraft: what causes deflation in Russia

According to the results of June, deflation in monthly terms was recorded in Russia for the first time in almost two years.

Such data on Friday, July 8, were presented by the Ministry of Economic Development and Federal State Statistics Service.

According to departments, in the first month of summer, consumer prices for goods and services in the country decreased by an average of 0.35% compared to May.

The last time a similar situation could be observed was back in September 2020.

As explained in the Ministry of Economic Development, the main contribution to deflation was made by the fall in food prices - by 1.1%.

First of all, the observed dynamics is associated with a noticeable reduction in the cost of fruits and vegetables - immediately by 9.57%.

The cost of non-food products fell by an average of 0.41%, while services, on the contrary, rose in price by 0.88%.

At the same time, inflation in annual terms slowed down from 17.1% to 15.9%.

The situation with prices in Russia is gradually stabilizing after sharp jumps in the first half of spring.

Recall that in March, annual inflation accelerated from 9.15 to 16.69%, and in April it reached 17.83%, the highest level in the last 20 years.

Then the emotional reaction of the financial market and ordinary citizens to the Western sanctions against Russia led to a sharp increase in prices.

In March, the ruble fell to a record low against the dollar and the euro, and the Russians began to massively buy food and goods.

However, already in May, inflation in the country fell to 17.1% in annual terms and continued to decline with the onset of summer.

Due to the initiatives of the authorities and changes in the conditions in foreign trade, the ruble managed not only to fully win back sanctions losses, but also to strengthen as much as possible over the past seven years.

Meanwhile, the rush demand in stores began to fade, which also put pressure on prices.

“The panic among the population subsided, citizens stopped buying goods in reserve.

At the same time, the enterprises adjusted selling prices for their products against the backdrop of declining demand.

Thus, the market is now in the process of finding a balance between the cost and supply of goods, ”said Nikita Maslennikov, head of the Finance and Economics department at the Institute of Contemporary Development, in an interview with RT.

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A moderate decrease in prices for some groups of goods can be observed throughout the summer, since at this time a lot of fruits and vegetables from Russian producers traditionally hit the shelves of stores.

Georgy Ostapkovich, director of the Center for Market Research at the Institute for Statistical Research and the Economics of Knowledge at the National Research University Higher School of Economics, spoke about this in an interview with RT.

“Fruits and vegetables have a significant share in inflation, so such a price reduction is natural.

In addition, the ruble is still quite strong, which partly knocks down the growth in the cost of imported goods.

The main thing is that the deflationary dynamics should not drag on for a long time, otherwise manufacturers will begin to incur losses and will reduce the production of goods, ”the expert emphasized.

Spiraling down

The deflationary trend observed today and the slowdown in lending indicate weak consumer activity in Russia, which remains one of the key challenges for economic recovery.

This was announced on July 5 by the head of the Ministry of Economic Development Maxim Reshetnikov.

“The loan portfolio of individuals is not growing, and for companies, the main increase comes from our preferential lending programs.

At the same time, deposits are growing: in conditions of high real rates, both the population and companies are in no hurry to spend money, but prefer to save it,” Reshetnikov explained.

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Earlier, the minister did not even rule out the possibility of the Russian economy slipping into the so-called deflationary spiral.

We are talking about a situation where lower prices lead to economic stagnation, a drop in production and consumption, which provokes an even greater reduction in the cost of goods and services, and in the future - a recession.

Meanwhile, the Central Bank has so far declared that there are no risks of such a development of events.

“Now, indeed, in recent weeks we have been reducing prices, but here we need to be careful in assessing this factor.

I don’t see any deflationary spiral – this is largely a correction after the sharp rise in prices that we had in late February and early March.

If you look at prices for many products that were a year ago, they are significantly higher.

But, of course, we are monitoring the situation and we see a slowdown in price growth for a wide range of goods,” said the head of the Central Bank, Elvira Nabiullina.

According to her, the regulator will continue to assess the situation and in the future may again lower the key rate.

According to Georgy Ostapkovich, such actions of the regulator should stimulate demand in the economy.

“Reducing the cost of loans for businesses allows enterprises to maintain an acceptable volume of output, because without such support and in the face of falling demand, they would be forced to significantly reduce production.

Due to this, companies can upgrade equipment and not reduce staff, as well as quickly increase the production of goods if necessary, ”the economist noted.

Recall that at the end of February, as an anti-crisis measure, the Central Bank more than doubled the key rate - from 9.5% to a record 20% per annum.

However, as the situation in the economy stabilized, already in April the regulator began to soften monetary policy, and in June returned the rate to the pre-sanctions 9.5% per annum.

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In addition to lowering the key rate, the measures taken by the authorities to support the growth of incomes and welfare of citizens should disperse demand among the population, Olga Belenkaya, head of the macroeconomic analysis department of FG Finam, is sure.

So, for example, since June 1, pensions and the minimum wage, as well as the living wage, have been increased by 10% in Russia, which affects the formation of the size of many social benefits and payments.

“Budget stimulus, including the expansion of social support, as well as the reduction of interest rates on preferential mortgages to 7% per annum, will help revive consumer activity.

However, in our opinion, with the already accumulated inflation of about 16% in annual terms, it is really premature to talk about the threat of prolonged deflation, ”the RT interlocutor suggested.

According to her, until the end of 2022, annual inflation will remain in the range of 15-17%.

To fall below this corridor, according to the expert, the indicator is still hampered by an increase in logistics costs against the backdrop of sanctions.

However, a full-fledged launch of parallel imports will help expand the range of goods, which will lead to an increase in supply on the market, Nikita Maslennikov is sure.

“Nevertheless, entrepreneurs need predictable rules of the game, which the government should outline in the near future.

We are talking about the tax burden, scheduled business inspections and the amount of financial assistance to enterprises.

The solution of these issues will allow the economy to quickly adapt to new conditions and restart, which will have a positive impact on the population,” the specialist concluded.