ON THE BRINK OF RUNAWAY INFLATION

The official monthly price indexes (500% in January, 175% in February and 128% in March on the wholesale market, and correspondingly 345%, 138% and 130% on the retail market) are very optimistic for many reasons and can be viewed as minimal. The Russian Statistics Committee does not compute inflation indexes, but they are close to consumer price indexes considering the "repressed inflation".

How can one assess the economic situation in a place where the monthly rate of inflation has been expressed in two-digit figures for nearly six months now?

Some books on economics describe runaway inflation as a state of the economy in which prices rise at a rate of more than 50% per month for an extended period of time - six months or more. On the strength of this definition, our situation is not yet runaway inflation. But how justified are the hopes that prices will soon stop growing?

Unfortunately, analysis shows that the inflationary potential in the Russian economy today is exceptionally high. Here we have practically every type of inflation in the book.

Cost-push inflation. It was caused by a number of factors.

First, the steep increase in contract prices in January 1992 couldn't help but affect prices on the other markets - the job and equipment markets, etc. The February growth of population incomes (146.3%) and of wholesale prices (175%) visibly outstripped the growth of consumer prices (138%). That laid the basis for a further increase in contract prices, and they began to climb in late March. This is a typical cost-push inflation pattern where the increase of cost and prices in certain economic sectors bounces back at them with a gradually weakening impact.

On the whole, this imbalance was in evidence during the first three months of 1992: wholesale prices were rising much faster than retail prices. If the March price index is applied to December, the gap (according to official statistics) was 2.2 times. At the same time, the prices of fuel and energy resources were growing 33.7% slower than retail prices. This signifies that the tremendous pressure on retail prices can be attributed to growing costs from industry in the absence of an energy price hike. It is extremely difficult to contain such pressure.

Second, the new spiral in the general increase of prices is pushing energy prices up. In late April a decision was made to raise oil and gas prices 4.5-6.5 times. The government's forecast about retail prices rising 50-75% is excessively optimistic. One can expect a doubling or tripling of the prices of all goods and would swing back to hit the oil and gas industry after a month or two. This would predetermine yet another round of oil and gas hikes.

Since consumption of energy varies considerably from industry to industry and from region to region, one of the first consequences of the freeing of oil prices would be considerable disruption in the existing sectoral and regional differences of prices and profits. Attempts to right this imbalance would give a powerful impetus to further price rises.

The government's objective of matching the world oil prices as much as possible does not take into account the fact that the Russian economy has an entirely different structure, different and larger amounts of energy resources and a material-intensive national income. It follows that higher energy prices in our situation would not only push up other prices but also affect production volumes and the structure of consumption.

Finally, the big increases in wages and pensions (from 342 to 800-900 roubles a month) in May, as well as mounting strikes for still higher pay started the classic race between prices and incomes which is being thus far kept under control only by virtue of insufficient cash supplies. As long as there is no wage indexation the race will be kept in check. But it is obvious that further yielding to social pressures is inevitable. The race will obviously pick up speed step by step. Indeed, the absence of wage indexation, which might control the speed of the race, could result in an escalation of social demands.

The transition to a single exchange rate for the rouble. The elimination of preferential exchange rates would, on the one hand, sharply step up the number of offers to commercial enterprises on the exchange market, on the other, increase manifold the costs of enterprises that traditionally depend on centralized imports (today they buy raw materials and finished products at the rate of 5.4 roubles per dollar).

The government's decision concerning forms of subsidies - direct transfers from the budget for these enterprises against providing subsidies, may have different consequences on the rouble's free exchange rate, the intensity of the inflationary pressure of costs on individual commodity markets, as well as on bankruptcies and unemployment. Direct subsidies for enterprises that depend on centralized imports would put too heavy a burden on the budget. Most likely, the government will opt for partial budgetary compensations which would result in costs exerting an increasing pressure on prices.

Demand inflation. As long as there is a substantial budget deficit and too many loans being issued, there will be a basis for growth in prices. As shown above, this source of inflation have not been stemmed completely.

All decisions on additional state expenditures in conditions of the budget deficit can breed inflation especially when the deficit - like Russia's - is covered almost exclusively by issuing more money.

Ever widening divergences between the domestic economic policies of the CIS countries, as well as their resolve to issue their own currencies, appear to intensify the influx of the rouble mass into Russia.

Tax-push inflation is on the rise. It has become quite clear by now that contract prices are high not only because of inflationary expectations, but also because taxes are actually added to prices as production costs. The situation is largely aggravated by the fact that tax rates can hardly be reduced because of the critical state of the Russian budget.

Finally, as world experience shows, trying to bring prices into proper correlation causes further overall growth of prices.

Thus the economy has a colossal inflationary potential which remains, despite its soaking up of the excess money supply and this potential will certainly break loose in the coming months. It is being held up by the shortage of a ready cash supply, but this is too weak a barrier.

To all appearances inflation in this country follows a peculiar pattern: price surges between inflationary lulls.

In addition to purely quantitative signs, there are important qualitative signals of the inflationary state of the economy, and we can clearly distinguish them today.

Steady inflationary expectations. People in the USSR were first jolted out of their belief that prices should remain unchanged in 1987 when the expediency of raising retail prices was brought up. The people lived through four periods of panic during the past two years - May 1990 (USSR Premier Nikolai Ryzhkov announced a price reform); January 1991 (exchange of large denominations); the first three months of 1991 (expectation of the price reform); and November-December 1991 (the Russian President announced liberalization of prices). There were also constant claims by Russia's new leaders that the rouble no longer made any sense, that money reforms was inevitable, that the economy could be stabilized with the help of inflation, and that everything had collapsed one way or another, etc. As a result, even the most stubborn rouble supporters were no longer so sure.

The skyrocketing dollar exchange rate when President Yeltsin announced reforms in October 1991 was a sure sign of a panicked demand for stable foreign currency. The panicked buying in the expectation of the promised price rise in two months' time was also obvious. These behavioural stereotypes have not been broken by the reform only because inflation has not been stopped. The rather stable and widespread fleeing from the rouble is a harsh reality.

So far these stereotypes are true of current incomes. The first three months of the year even registered some growth in savings banks deposits (this is only an absolute rather than a relative growth). But this growth can be attributed to a rumoured money reform and transfers to Russia of rouble savings from the other republics (because of the relatively less acute shortage of cash in Russia and plans to introduce national currencies). There is also a disturbing trend in savings banks deposits which are failing from month to month. If it keeps up, the net outflow of public savings will become a reality (this is already taking place in a number of regions) and pose serious problems to the Savings Bank and the budget which relies on most of the bank's resources.

People now assess any sum of money in terms of relatively stable foreign currencies, and prices of goods and services can be quoted in Western currencies. The supply of foreign currency inside Russia is comparatively small to be giving rise to such a stereotype. But the stereotype is being formed in big cities and primarily in Moscow. Prices of many locally produced goods, that have no chance of being sold abroad (Russian radio equipment, apartments, many types of food, etc.) tend to be quoted in dollars. The range of such goods is rather wide.

Changes in the credit market structure. The volume of long-term (more than a year) investment credits has plunged. An average loan term of today is 2-3 months.

While the list goes on, the facts quoted so far are sufficient to realize that Russia is on the brink of runaway inflation.

More than that, the door is open and we are being irresistibly drawn in the direction.

With suppressed inflation of demand the cost-push inflation would mount in every direction. Far from decreasing, this pressure is growing compared with its level at the start of the year.

Given this country's political realities, the conclusion that the least. On the contrary, runaway inflation is becoming inevitable.