Consumer prices in Russia climbed 8.8% in 2010

In January – December 2010 food commodity prices rose on average in Russia by 12.9%  (against 6.1% in 2009). The rapid increase in food prices was the major contributor to the CPI growth in 2010. Prices of services grew 8.1% (against 11.6% in 2009). Prices of non-food commodities climbed an average of 5% (against 11.6% in 2009). Thus, the major factors of the 2010 inflation dynamics were the effect of the low 2009-base on the one hand, and the money supply growth taking place against the background of slow recovery in economic activity plus the aggregate supply shocks of the summer of 2010, on the other.

The most important component of inflation in 2007 – 2010 was the growth in prices for food commodities, which traditionally constitute a considerable part of household expenses. It should be noted that the growth rate of food prices in 2010 was two times higher than in 2009. The major culprit behind this increase was the summer drought of 2010. This conclusion can be made on the basis of the fact that the growth rate of food prices began to significantly accelerate in the autumn, and the most rapidly growing prices were those of the food products affected by the drought. At the same time, it should be pointed out that although food prices experienced a rapid rise all over the world in 2010, in the majority of developed countries the CPI remained at a low level. Therefore the behavior of prices in Russia can be explained by the greater opportunities for rising prices available to Russian companies because of a lack of competition; by the consequences of the acceleration of the money supply growth rate in late 2009 and early 2010; and by the high inflationary expectations that had emerged by that time.

As regards the category of non-food services provided to the population, it should be noted that prices for public utility services continued their climb. At the same time, their rise in 2010 was much less steeper than in 2009, while the period of 2008 and 2009 had even seen an acceleration of their growth rate. A further reduction in the growth rate of prices for public utility services in the process of their leveling off for the population and enterprises, as well as the planned cutting of the government subsidies designed to lessen the public utility tariffs, is going to substantially reduce the contributory role, in the inflation processes, of any further rise in prices for public utility services.    

In 2010, the lowest rise in prices was demonstrated by non-food commodities. The rapid increase in the prices for tobacco products was mainly caused by the growth of the excise duties levied on them, while that in the prices for knitwear, clothes and underwear – by the growth in the price of cotton caused by the poor harvest.

Thus, in Russian conditions, the recovery of prices for major Russian exports (in spite of the outflow of private capital), the adverse supply shock, and the budget deficit being covered at the expense of the Reserve Fund caused a rise in inflation in the second half of the year 2010. Due to the low rate of inflation in the first half-year, the 2010 CPI remained at its 2009 level. However, if the afore-mentioned trends persist in 2011, the rate of inflation may fail to continue its downward slide and so will remain at the level of 8-9%.

P.V. Trunin – Candidate of Economic Sciences, Head of the Monetary Policy Department