Ministers vow to tackle soaring inflation

Rising oil and food prices have pushed inflation up to 12%, forcing the government to give up its original target of 7% to 8% for the year. Experts are divided on the best way to deal with the problem.

In the face of rising global food costs, record high oil prices, and surging capital inflows in the first half of the year, the government’s original inflation target of 7% to 8% did not stand a chance.

Finance Minister Aleksey Kudrin said battling inflation remained a priority.

“We lost 2007, but we will be able to catch up with our inflation goal of 5% – 6% by 2010,” Kudrin said.

But 5% inflation is a distant dream for consumers and for the government.  Officials began 2007 with an inflation target of 7% – 8%, which had been revised up to 12% by the end of the year as prices soared.

The Russian government has intervened by freezing prices on staple goods such as milk to keep prices steady for consumers at shops. But economists say price freezing is only a temporarily measure and once it's lifted, prices will inflate again.

One of the most obvious measures the government could take is to increase the value of the rouble.  That would put a lot of pressure on Russia's exporters. And some economists say it would backfire.

Chief economist at HSBC Russia, Aleksandr Morozov, says appreciating the rouble doesn't make sense.

“In a very short time the Central Bank would have to do the reverse, to weaken the rouble because the pressures would be on the other side, and there would be more demand for hard currency,” Morozov said.

Another option – higher taxes on company profits – carries dangers of its own.

Chief strategist at Uralsib Financial Corporation, Chris Weafer, says squeezing corporate profits won't solve the problem.

“The only way out of this is to allow the rouble to appreciate very strongly and live with the consequences in the short term,” Weafer said.

It is obvious that the government will have to implement some policy changes if it wants to keep price growth under control in 2008.