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Friday, July 18, 2008

The True Horror of Russia's Real Inflation Rate

The Moscow Times reports that the wages of ordinary working Russians will fall by 25% in 2008 as the result of inflation -- these are folks who are already burdened by slave wages on the order of $4/hour. Remember, general inflation of just 5% is viewed in the United States as a life-threatening crisis. The price of a Mercedes or BMW is only rising at half that rate, so Russia's rich can console themselves with that fact even as their own standard of living plummets considerably.

The inflation rate for the nation's poor is set to hit 25 percent for 2008, according to a recent survey, well above the 14 percent it projected for the country as a whole.

During the first half of 2008, the cost of a minimum basket of foodstuffs rose by 20.6 percent, FBK Consulting Group said in a statement released Monday. The effect is amplified because food costs comprise 45 to 50 percent of low-income consumers' total purchases, Igor Nikolayev, FBK's director of strategic analysis, said in the statement.

"What's really notable is that the prices of the products that comprise the minimum set of foodstuffs purchased by the Russian poor are rising at the fastest rate," Nikolayev said.

The cost of the basket also rose sharply in 2007, by 22.3 percent, with a 13.1 percent increase in the first half. By contrast, from 2003 and 2006, the cost of the minimal set of foodstuffs rose an average of 10 percent per year.

The government is currently forecasting inflation at 10.5 percent for the year, although analysts and many in the government say the target will now be difficult to reach. Inflation was at an annualized 15.1 percent in June, according to the State Statistics Service.

From January to June, prices for fruit and vegetables increased by 36 percent, pasta by 26 percent, sunflower oil by 25.9 percent, bread and bakery products by 20.7 percent, and cereals by 20.4 percent, the report said.

As a result of the rising food prices, FBK said, the number of people living below the poverty line could increase in Russia for the first time since 2000 — from 18.9 million last year to 20 million people in 2008.

Other economic specialists, however, were skeptical about the deleterious effects that the price hikes would have on the poor.

"It's difficult to say how exactly inflation will affect the lower classes because we cannot say by what percentage wages will increase or decrease in the future," Alfa Bank economist Natalya Orlova said.

In addition, analysts said, if wages keep up with or rise faster than the cost of food, lower-income consumers will not be hit as hard in real terms. In June, Prime Minister Vladimir Putin said the government would increase spending on wages and social benefits to serve as a cushion against rising food prices.

"It is highly likely that the government will increase wages in response to the increase in inflation," said Pavel Trunin, an analyst at the Institute for the Economy in Transition. "Because wages are currently rising at a faster rate than is inflation, the nation's poor won't be poorer."

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