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Cabinet fails to contain inflation

Russia's Ministry of Economic Development and Trade says inflation could reach 11% this year, up three percent on the government's original target.

Food producers have been asked to freeze prices for a few months, but the government's long-term options are limited.

Oil prices are at record levels. A surge in capital inflows in the first half of the year is rising global food prices.

Put these together and you've got a serious amount of inflationary pressure on the Russian economy, with experts divided on how the government should handle it.

Appreciating the rouble or increasing taxes on producers would help reduce inflation, but they'd also cut into company profits – hurting the economy.

“The best available policy on behalf of the Russian policy makers is just let the inflation accelerate even higher. And then deal with it as soon as there will be a possibility for dealing with it,” commented Vladimir Osakovsky, economist from Aton Broker, Moscow.

Others say, the government has to address the problem, especially as foreign investment into Russia is forecast to rise next year and rouble appreciation's the best way to do it.

“The reality is that the only way out of this is to allow the rouble to appreciate very strongly and live with the consequences over the short term,” proposed Chris Weafer, chief strategist at Uralsib Financial Corporation, Moscow.

But Russia's Central Bank says it will not appreciate the currency this year. And the government says it's sure this year's inflationary spike is not the start of a trend and  it's sticking to its forecast of just 7% inflation for next year.