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. Last Updated: 07/27/2016

Kudrin Pessimistic in Fight Against Inflation

bloombergFinance Minister Alexei Kudrin
Russia is losing the fight against inflation, Finance Minister Alexei Kudrin said Tuesday, as new figures showed that monthly retail price growth accelerated in March.

"We are already deviating from the goals of fighting inflation," Kudrin, a fiscal conservative, told an economic policy seminar.

The consumer price index increased by 1.3 percent month on month, in March -- the fastest for the month since 2001 -- and up from February's 1.2 percent rise. Economists polled by Reuters had forecast a 1.0 percent increase.

Retail prices rose by 5.3 percent in the first quarter -- above the rate of 3.5 percent recorded in the same period a year ago, official data said, showing that a New Year resurgence of inflation was becoming entrenched.

Worryingly, food prices rose fastest with cabbage -- a key ingredient in popular Russian soups -- going up by 32.8 percent.

Kudrin sounded his inflation warning after losing a budget battle last week to Prime Minister Mikhail Fradkov, who secured the backing of top ministers for a doubling of public sector pay and pensions by 2008.

Fradkov also won grudging ministerial support for a proposal to hike the level at which windfall oil revenues are funneled into a budget stabilization fund to $27 per barrel next year from $20 now.

Kudrin said that drawing on surplus cash in the stabilization fund, now worth $25 billion, to finance state investments could fuel demand that was already overheating. "This will weaken our financial policy," he said.

Most government officials now concede this year's 8.5 percent inflation target is no longer attainable but still hope it will be below the 11.7 percent recorded in 2004.

But the Central Bank is not yet ready to give up, with bank chairman Sergei Ignatyev saying the 8.5 percent figure was still attainable.

"After the first quarter it will be extraordinarily difficult to achieve a reduction in inflation to 8.5 percent in 2005, but I do not think it is absolutely impossible," Ignatyev told a banking congress Tuesday.

"For the time being, we do not intend to change our inflation and real exchange rate targets and we will pursue the appropriate monetary and exchange rate policies."

Economists shared Kudrin's diagnosis that underinvestment in the economy meant that supply was not able to meet demand created by liquidity flooding the economy thanks to bumper oil export revenues.

Anton Strutchenevsky, an economist at Troika Dialog, said Russia was facing a supply and demand shock. "People are decreasing their savings ratio and beginning to spend more on consumption," he said.

The World Bank said Monday that rising costs were braking economic growth, which has slowed noticeably this year, with wage rises outstripping productivity growth, the ruble gaining in real terms and input prices soaring.

Aton brokerage chief economist Peter Westin said it was inevitable that rapid producer price inflation -- which ran at 17.3 percent year on year in February -- would feed through to retail prices sooner or later.

"Remember that PPI remains very high, despite a small dip in January, so at some point we will see retail and wholesalers pushing their increasing costs onto consumers," Westin said.