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. Last Updated: 07/27/2016

Inflation Soars, Ruble Rate Targeted

VedomostiFinance Minister Alexei Kudrin
Inflation is making a comeback: Consumers are angry, politicians are worried and economists are skeptical over official price data, which they say do not tell the whole story.

The government missed its 10 percent target for 2004, ending up with 11.7 percent, casting doubt on the feasibility of this year's 8.5 percent forecast. Even the ministries responsible for the economy are divided on the issue.

Finance Minister Alexei Kudrin said Tuesday that the target would be met, mainly by letting the ruble appreciate against the dollar -- a remark that did just that.

"This year [inflation] will be 8.5 percent. We need to use additional instruments of monetary policy, including ruble appreciation," Kudrin said. His comments sent the currency to its strongest level against the greenback in a week.

Most economists are forecasting that consumer prices will rise between 11 percent and 15 percent this year, and even a senior official in the Economic Development and Trade Ministry doubts the 8.5 percent can be reached.

Andrei Klepach, the ministry's chief forecaster, said later Tuesday that price rises in January had already put this year's target in jeopardy.

"The results for January make it extremely hard to achieve the goal of inflation at 8.5 percent. But for the time being, the government is not abandoning its target," Klepach said.

The higher inflation comes as President Vladimir Putin is embarking on some of the most difficult economic changes since the fall of the Soviet Union. Benefits for pensioners, veterans and disabled people, including free transportation, telephone calls, housing and medicine, were replaced at the beginning of this year with monthly cash payments. Those payments, to be paid to 32 million people, start at $7.

"There's a substantial potential for inflation this year, and the target of 8.5 percent is wishful thinking," said Peter Westin, an economist at Aton Capital. "Inflation is unfortunate, but it's also a necessary consequence of adjusting prices and wages. It is part of the transition" from a cradle-to-grave social-welfare state, he added.

Price tags in stores tell the story: A bag of groceries costs 20 percent to 30 percent more than it did a year ago, economists say. And Russians fear higher prices. According to a recent survey by the Levada Center, an independent polling group, Russians perceived the main threats to the country in 2004 to be inflation and poverty.

January offered the first official hint that inflation -- not uncommon in high-growth emerging markets -- was accelerating. In the first three weeks of January, inflation raced past 2 percent. If that pace were sustained, prices could rise 24 percent this year.

Inflation is a sensitive issue in a country where people have had their savings wiped out at least three times since the fall of communism in 1991. In the mid-1990s, prices doubled -- sometimes tripled -- every month.

In the last few years, the Cabinet ministers in charge of the economy, Kudrin and Economic Development and Trade Minister German Gref, have managed to keep inflation tame and still keep the longest boom since the fall of communism going. But with the state spending heavily to placate pensioners riled by reforms, fears are growing that high inflation could become entrenched, damaging economic growth and competitiveness.

The resurgent price growth has also thrown the spotlight onto official data, which ordinary folk and trained economists agree do not fully reflect the underlying reality.

"Prices out of a horror film!" screamed a recent headline in Moskovsky Komsomolets. The newspaper compared prices of goods in shops and markets with official data: A kilo of "real" beef in Moscow costs as much 250 rubles ($9), or 2 1/2 times the official figure. "The powers that be are juggling the figures," it concluded angrily.

(NYT, Reuters, Bloomberg, MT)