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. Last Updated: 07/27/2016

Price Hikes Will Not Stroke Inflation

Russia this week moved to allow price rises for gas, power and railroads.

Starting from Monday, national power grid Unified Energy Systems, gas giant Gazprom and the Railways Ministry were allowed to hike charges by between 10 percent and 16 percent.

The railroads lifted prices 10 percent on cargo transportation and their cheapest passenger fares. Prices at the high end of the market increased 20 percent.

Wholesale power prices were hiked 16 percent, and corresponding increases are likely to follow at a regional level.

The three so-called natural monopolies are kept under a tight rein by the government, with any price changes needing state approval. As a result, the sectors suffer from huge price distortions both on a macroeconomic and corporate level. Even after this week's price rises, the overwhelming majority of consumers - especially in the private sector - pay well below cost for their gas, electricity and railroad fares.

As a result, inflation is unlikely to react strongly to the price rises.

However, Gazprom, UES and the railroads between them make up about 15 percent of Russia's gross domestic product, so wholesale price increases will sooner or later feed into higher consumer prices.

The pace of inflation has been declining for the past few months, despite growing pressure due to higher gasoline prices, which have increased threefold since the start of the year. This is mostly due to the general population's low level of purchasing power, a factor that is likely to ensure that the utility price hikes also have little impact on inflation.

Helping to ease pressure on prices, wholesale gasoline prices dropped in the last week of October. The end of the harvest season brought about the usual drop in demand from the agricultural sector.

While the week's price rises for utilities will sooner or later feed into consumer prices, inflation keeps slowing down and could end up below 40 percent by year's end, just 10 percent above the level written into former Prime Minister Yevgeny Primakov's government budget, and less than half the 100 percent figure many economists were forecasting when the year began.

If inflation does come in at 40 percent or under, it will mean that inflation for the second half of the year has come in at under half the 27 percent price rise that occurred in the first half of 1999.

The outlook for 2000 could be even brighter. The Economic Expert Group, a semi-independent research center with close ties to the Finance Ministry, also forecasts annual inflation for 1999 at less than 40 percent, and says that next year will see inflation of less than 24 percent.

However, analysts' forecasts are more pessimistic. Renaissance Capital anticipates a 40-percent price increase by year-end.

Brokerages forecast inflation of 33 percent or 35 percent next year due to high levels of extra expenditures in election year.

"Nothing is in the cards at least until mid-next year, but if prices grow, we will have to move in again," said Vladimir Mokhov, head of the wholesale pricing department with the Federal Energy Commission.