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1 Jul, 2008 13:06

Soaring prices spark debate over inflation

Inflation in Russia has reached 8.7% sparking fresh debate over the future of the country’s economy. Prime Minister Vladimir Putin says higher spending must go ahead to maintain the pace of development. But Finance Minister Aleksey Kudrin argues the econo

Chief economist at Trust Bank, Evgeny Nadorshin, sums up the dilemma. “Cutting the Government’s spending would be helpful for getting inflation under control,” he said.

But he adds that doing that would clash with current economic policy and the many projects Russia is pushing forward. “Economy diversification, infrastructure investment, state corporations all need money,” he said.

Federal budget spending has grown by 24% this year. Analysts say that is the main reason the government will break its target of 10.5% by as much as 3%.

Another area of inflation is food – consumer prices are much higher in Russia than elsewhere. Due to a lack of long term price agreements between producers and suppliers, prices are now more volatile than ever.

Inflation also remains a major concern for investors.

Higher government spending is often blamed on the recent political election or on a desire to raise living standards. But many experts fear it hurts much of the population as prices rise first, and wages lag behind.

Ultimately, many economists expect inflation to come down over the next two to three years – especially if the Government acts by pushing spending back down, allowing the rouble to rise, or by raising capital requirements for banks.