Russia to miss 2007 inflation target: Economic Minister

Russia won't meet its yearly inflation target of 8% according to new Economic Development and Trade Minister, Elvira Nabiullina. The admission comes in the wake of September figures, showing a monthly jump of 0.8%.

And while consumers are spending more on everyday products, the government is searching for an effective policy response.

After rising to 0.8% for September – more than twice the forecast – inflation for the first 9 months of 2007 stands at 7.5%, with the September figures now pointing the way to an annual inflation rate of about 9.5%.

The main inflation driver last month became groceries, especially dairy products which rose by up to 13% for the month. In acknowledging that the annual target of 8% would now be surpassed, Nabiullina said the government would act.

“The ministy is working on the range of measures to fight inflation which includes foreign trade regulation as well as fighting regional monopolies because the price jump differs from region to region. Also the stimulation of the domestic agricultural production. It includes raising duties on grain, dairy products and this measure will limit the growth of prices on domestic market,” she said.

They have a very strong Central bank at the moment and they have a lot of tools which they can use: the currency – they can strengthen it on demand which can lower inflation: they can basically increase the use of the Stabilization Fund and raise taxes. There is a lot of things oto offset the possible inflation in Russia. Russian government is very well placed to deal with inflation

Derek Simmross, Pharos Group

Economists say growing Russian consumer demand combined with rising wages and disposable incomes means increased money supply is helping drive inflation.

According to Vladimir Osakovsky, economist at Aton Capital in Moscow, “inflation is driven by money supply and its dynamics.”

“Throughout the year the money supply was expanding at really fast level like 30%. Inflationary pressure that was building up throughout the year is coming into the force and it will last another couple of months,” he concluded.

Current inflation jump comes at a very bad time. In the wake of the global liquidity crisis the support of the Russian Central bank to head off credit problems may only aggravate inflation. But analysts say the Central bank has enough tools to control inflation.

“They have a very strong Central bank at the moment and they have a lot of tools which they can use: the currency – they can strengthen it on demand which can lower inflation: they can basically increase the use of the Stabilization Fund and raise taxes. There is a lot of things oto offset the possible inflation in Russia. Russian government is very well placed to deal with inflation,” Derek Simmross, trader at Pharos Group believes.

The new cabinet has not changed the 8% inflation target for the time being. But managing Russia's ongoing economic boom means that doing something significant about inflation will be a key priority for the new government in the short term.