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. Last Updated: 07/27/2016

President Warns of Spiraling Inflation

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President Vladimir Putin warned on Monday that inflation was threatening to ruin economic growth targets, saying that prices grew almost twice as fast as expected in the first three months of the year.

"Inflation in the first quarter was twice as high as forecast in the budget," Putin chided government officials at a meeting reviewing economic data for the first quarter. "It is beginning to erode budget revenues and is posing a threat to economic growth."

The price hikes were triggered by increases in power, railroad and gas tariffs coupled with raises in pension payments and wages to the public sector, the government said.

Household utility bills shot up 12.9 percent from January through March, making inevitable the growth of consumer price indices.

Until Monday, Putin had kept mum about inflation, while government ministers have offered repeated assurances that the matter was under control.

Prime Minister Mikhail Kasyanov told reporters Saturday that inflation would not exceed the annual target set at year's start of 12 percent to 14 percent.

Prices jumped 7.8 percent since Jan. 1, but the inflation "was more qualitative," Kasyanov said. "It was due in large part to a growth in tariffs" rather than the printing of excess rubles.

At a Russian economic forum last week, Finance Minister Alexei Kudrin also promised foreign investors that inflation would be kept in check.

But Putin said Monday that inflation must be further tamed, calling on the Cabinet to tighten fiscal policies in order to avoid inefficient spending.

In a bid to keep inflation low, the Central Bank has already been moving to tighten its monetary policy by printing less rubles. The country's monetary base — the amount of cash in circulation and the obligatory reserves of commercial banks in the Central Bank — increased 3.5 percent from January to March, or about half the pace of inflation, according to the Central Bank.

Such a move could put the government, which is determined to rake up strong economic growth figures this year, between a rock and a hard place, economists said.

The problem is that prices are continuing to grow even though the Central Bank is printing less money to keep inflation low. In other words, there is less money available to buy increasingly expensive goods and services. The end result would be stifled economic growth.

United Financial Group estimates that at the current monthly rate of 1.4 percent, the amount of rubles in circulation will increase about 20 percent in 2001, matching its year-end inflation forecast of 20 percent.

"This would mean the monetary policy would be very substantially tightened, implying virtually no economic growth this year," said Alexei Zabotkin, chief economist at UFG.

So far, however, the economy is showing no signs of fatigue.

Kasyanov said Saturday that the gross domestic product grew year-on-year 4 percent in the first quarter and industrial output increased 3.5 percent. Household incomes rose 5 percent in real terms.

The Moscow Narodny PMI index ticked up to 53.2 in March, well above the 51.4 measured in February. Any figure above 50 shows continuing industrial growth.

Analysts said Putin's inflation warning appeared to be more of an attempt to call the Cabinet into line than a dire warning about a looming economic disaster.

"It is clear that inflation will stay above target, but this alone does not bode ill for the economy," says Georgy Trofimov, senior researcher with the Institute for Financial Studies.

Annual inflation of less than 30 percent does not have a direct negative impact on the economy, Trofimov said.

Inflation in 2000 rang in at 20.2 percent, passing the targeted 18 percent by a marginal 2 percent. The Central Bank later blamed nonmonetary inflation factors, namely tariffs, for the higher-than-expected growth.

Troika Dialog forecasts inflation in 2001 at 18 percent, while the Institute of Financial Studies puts the figure at about 20 percent.

Monthly inflation stood at 2.8 percent in January, 2.3 percent in February and 1.9 percent in March, according to government figures. Economists predicted inflation would go up a further 2.1 percent in April.

The government says it plans to increase tariffs at least one more time by December. "A growth in tariffs will push prices further up," said Sergei Prudnik, macroeconomic adviser at Troika Dialog. "But in the short run, inflation even stimulates economic growth."

However, inflation also erodes budget revenues and expenditures in real terms, so government-funded institutions and pensioners are likely to see their spending power decrease, other analysts said.

Also Monday, Putin reiterated his plan to split the budget into two parts to set aside extra revenues for a rainy day. "The federal budget should be immune from external shocks," Putin said.