VIII Международная студенческая научная конференция Студенческий научный форум - 2016

Inflation is one of the most acute problems of modern economic development in many countries, adversely affecting all aspects of society. It devalues the results of labor, destroying the savings of businesses and individuals, prevent long-term investment and growth. High inflation destroys monetary system, provokes the flight of domestic capital abroad, weakens the national currency, contributes to its displacement by the foreign currency in internal circulation. The phenomenon of inflation inherent in any economy, both market and transition. However, in developed countries it is not a serious threat, because there is practiced and widely used methods of its control and regulation. The government of any state has a responsibility to control inflation and recessions. The concept of inflation is directly linked to the circulation of money and arose when economic relations demanded the creation of a universal equivalent - money.

Even in 54-68 B.C. Roman emperor Nero, had experienced "spoiling" of money. He reduced the weight of the gold coin by 10%, the silver denarius by 12%. Thus, in ancient Rome in the I century B.C. e. there were inflationary pressures.

This historical example illustrates the existence of inflation in ancient past, however in our time, the problem of inflation remains one of the most pressing and painful problems all over the world, including in the Russian Federation.

The purpose of Computational Analytical Work is to analyze dynamics and characteristics of inflation from 2008 to 2015 in RF, to determine the main directions of improving the anti-inflationary policy of RF.

To achieve this goal I had following theoretical and practical problems:

• determine the nature, causes, types and effects of inflation;

• define main approaches of anti-inflationary policy;

• analyze inflation in Russia from 2008 to 2015;

• identify the main directions of improving the anti-inflationary policy of Russia.

The object of the study are inflationary processes and their impact on the Russian economy.

Information and statistics are based on data of Federal State Statistics Service, the analytical data of the Central Bank of the Russian Federation, the conference materials, the materials of the periodical press and the media.

The concept, types and indicators of inflation

Inflation is the process of depreciation of paper money, the fall in their purchasing power as a result of excessive emissions or commodity reduction in circulation for a fixed amount of money issued.

Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. The roots of inflation always are in the mistakes of government policy, such as significant budget deficit, the wrong actions on the issuing money and many other activities individually and collectively.

One of the most important classifications of inflation is the classification based on the sources of occurrence:

• Excessive demand inflation or demand-pull: in this case where the cash spending of the population and enterprises' grows faster than the real volume of goods and services, in other words there is excess demand pressure which increases prices.

• Cost-Push inflation or supply-side inflation: this kind of inflation is caused by the increase of costs in unit produced, primarily by increase in nominal wages and prices of raw materials and energy. This type of inflation leads to stagnation, that is, the simultaneous increase of inflation and unemployment in the background of the declining production.

Inflation appears in different degrees. According to its pace economists distinguish 3 types of inflation: moderate inflation, galloping inflation and hyperinflation.

• Inflation is moderate when prices rise slowly but steadily at a moderate pace (about 10% per year). The value of money is preserved, there is no risk of signing contracts at nominal prices. In industrialized countries, moderate inflation is considered as part of the normal functioning of the economy, which does not cause particular concern.

• Galloping inflation is characterized by a rapid increase in prices (from 10 to 100-200% per year). This growth can cause severe economic and social consequences, such as decline in production, the closure of many businesses, lowering the living standard of population, the contracts are tied to the price increase, money will materialize rapidly.

• Hyperinflation is a catastrophic rise in prices (up to 500-1000% or more per year). The world record of hyperinflation was in Hungary (August 1945 - July 1946), when prices grew monthly 20 times in average. Hyperinflation causes the collapse of the monetary system. Money no longer adequately perform their functions, large enterprises suffer from losses. Economic relations stop functioning and leads to barter exchange transition.

Economists use different types of indices, in particular, price indices to measure inflation rate. The most common are:

• The consumer price index or CPI

• The production price index or PPI

• The GDP deflator

1. Consumer price index

In world practice consumer price index is widely used. It is the index of retail prices of a specific basket of goods and services included in the budget of the average consumer and makes his cost of living. In order to calculate CPI, first of all, we have to determine a consumption basket: the most used set of typical goods and services. More diversified goods and services are included in the basket, more authentical reflections of dynamics of inflation are made. And then we should set a base period: change in price of a consecutive year is calculated based on the starting year.

1. The production price index

In order to calculate production price index we have to consider changes in prices of certain number of intermediate goods used in production. Changes in production prices reflect the dynamics of prices for raw materials, semi-finished products, materials, final products on the wholesale market. Two above mentioned indices are tightly related, so as the growth of industrial goods and services ultimately leads to higher retail prices.

1. GDP deflator

A method, which is often used to measure a general level of price, is index of Gross domestic product, so-called GDP deflator. Its basket includes all final goods and services produced in the economy. Consequently, the GDP deflator more fully reflects the price changes of goods and services in the society, not only covers certain groups of goods and services. Real GDP shows how much gross domestic product grew without taking into account a price change, using base year's price level.

Finally, inflation rate is calculated using either one of these 2 price indices or GDP deflator.

Effects of inflation and anti-inflationary policy

Inflation is an objective economic phenomenon, which cannot be avoided, however, it can be and must be fought. Basically, depreciation of money and increasing money supply is a normal process, however, a sharp jump in inflation could cause irreparable violations in the economic system. Thus, the socio-economic effects of inflation are as follows.

It destroys the usual economic ties. The economy faces imbalances and chaos. Investment process lingers, since due the uncontrollable price increase profit can be obtained without production extension.

Further, socio-economic effects of inflation are aggravated even more. Since no one needs a production in the same volume, the capital of this area moves into a circulation. First of all, it is the commercial structures, scrolling through which money bring huge profits fastly. At the same time, capital in search of more profitable use and guaranteed income flows abroad. Thus, corruption, speculation, shadow economy increases gradually.

As one of the socio-economic consequences, inflation has an impact on functioning of the monetary system. Banknotes suffer from impairment, people lose the incentive to accumulate them. Entrepreneurs and citizens prefer to invest their money in acquisition of real estate and various goods. Credit contracts also has to be broken, as in the new conditions it is unprofitable to give a little interest in the long term. In this case, the debt will be refunded in already depreciated amount.

Also, inflation does not contribute to the development of foreign economic relations of the country. Domestic products lose competitiveness, which makes it difficult to export. But the import of goods, on the contrary, increases, as in the domestic market they have higher prices. Inflation hinders inflow of foreign capital. The depreciation of the national currency leads to a decrease in its market and official exchange rate.

Inflation leads to a drop in the living standards of the population. This is especially true for those who had previously had a stable income, since income growth rate do not keep pace with rising prices for goods and services.

Inflation devalues those monetary savings that people had once invested in banks, insurance policies. The same happens with other financial assets, which have a fixed cost.

Also inflation increases unemployment, consequently social tensions rise. The population loses motivation and incentive to effective work.

All of the above mentioned economic and social consequences of inflation, in turn, influence market actors' behavior. Most likely, they lose confidence and trust to each other, as well as to the state. This will increase and economic instability in society.

To fight successfully the effects listed state carry out anti-inflationary policy. This is a whole complex of long-term and short-term measures, aimed at reducing the existing inflation rate, and preventing it from happening in the future.

Anti-inflationary policy of the state includes an extensive set of measures related to the suppression of the depreciation of money. In essence, the inflation rate is a reduction in the value of money due to a substantial increase in money supply in circulation. There are two basic approaches to the selection and implementation of measures to reduce the rate of inflation: monetary policy and fiscal policy.

The monetarists are supporters of the monetary control, which contains following measures:

1. The regulation of discount rate of interest, that is, interest rates, under which the National Bank lends money to commercial banks. Naturally, the change in the discount rate results in a similar change in the commercial rates. Thus, raising the discount rate, the central bank reduces the commercial banks' demand for money, and commercial banks are forced to raise their interest rates, thereby reducing the population's demand for money.

2. Regulation of reserve requirements: part of the assets of commercial banks, which must necessarily be stored in correspondent accounts of bank in the Central Bank. This method of regulation is similar to the interest rate adjustment, however, is somewhat less effective.

3. Transactions of state securities, such as bonds, treasury bills, etc., can remove money from circulation and replace it with less liquid government securities.

In the view of Keynesians, anti-inflationary policy of the government should be carried out by eliminating the budget deficit, which must be made by adjusting the population income, government spending and tax rates. The fiscal policy and involves the following tools:

1. Reduction of government spending on the maintenance of socially disadvantaged layer of population by reducing the payment of pensions, unemployment benefits, privileges, and so on;

2. Increase in tax rates makes the government budget receive more money, then issue less money to circuliation. Instruments of fiscal policy should be used very carefully, because it has very strong negative reaction from the population.

Dynamics of inflation in 2006 – 2015 in Russian Federation

Inflation in Russia, as in many countries, is calculated based on the consumer price index for goods and services. It is noteworthy that in Russia this index has been calculated only from 1991, as during the Soviet planned economy the official inflation rate had not been calculated. Following graph illustrates that during 8 years Russia demonstrates the highest inflation rate in 2008, which is known as global Financial crisis, and then crisis moves to recovery with 33% fall in inflation, in next 2 consecutive years inflation rate has changed slightly, after recovery inflation rate falls by 25% which indicates economic expansion. During 3 years of expansion change in inflation rate was stable keeping its level below 6%, however in 2014 mostly because of political reasons inflation rate rose rapidly, consequently in 2015 inflation rate is expected to fall by 1-2%.

For my analysis I carried out an interesting calculation using financial calculator on Statbureau website. According to my calculation accumulated inflation rate from January 2008 to October 2015 is 99.86%. Moreover during that time Price of goods has doubled and Russian Ruble have lost 56% of its purchasing power. 1000 Ruble in 2008 is equivalent with 439 Ruble in 2015.

And now I want to move to more detailed and comprehensive analysis of Russian inflation in 2008 – 2015.

According to the report of the Federal State Statistics Service (FSSS), consumer price inflation in 2008 was 13.3%. Thus, the rate of inflation was the highest since 2002, then it was 15.1%.

Since August 2008, the inflation rate began to increase rapidly, which in turn was a consequence of the evolving global economic crisis.

In 2008, compared with other countries, consumer prices in Russia were one of the highest in the world. For instance, tariffs on utility services in average increased by 20% in 2008. The world price of oil reached 100 us dollars per barrel. Gas prices have risen from 1 of January 2008 by 25% on average.

Therefore, the main factors that lead to noticeable level of inflation were: growth of tariffs for services, increase in utility prices and natural monopolies, inefficient anti-inflationary policy, rising world prices for agricultural products, government spending, and other political factors.

In 2009, the government managed to keep inflation within 8.8%, according to RSSS this inflation was the minimum since 1991. (see Table 1 in Appendix). In 2010, the maximum rate of inflation had been forecasted at 6.5-7.5%, but remained at the level of 2009 and amounted to 8.78%. The Russian government has repeatedly raised the forecast for inflation of 2010, primarily because of the drought, which caused a rise in price of food.

In the following period of economic expansion in 2011, 2012, 2013 inflation fell rapidly due to several reasons:

• a good harvest and lower prices for consumer goods;

• growth in food imports in background of strengthening exchange rate of ruble;

• removal of oil and gas revenues from the money market;

• Russia's WTO accession, and others.

Quite a different situation was in 2014. Federal State Statistics Service (FSSS) with Ministry of Economic Development forecasted the inflation rate of RF in 2014 at 4.5%. This optimistic forecast had every reason to come true: the Russian economy demonstrated a steady growth of GDP in the range of 2.5% - 3%, the Russian ruble gradually fluctuated in the range of 32-35 rubles per dollar, investment inflows increased slowly, and the price of oil did not fall. But the politics brought its own changes that were not taken into account by economists.

Inflation in Russia in August 2014 was 0.2%, then 0.5% in July, 0.6% in June, 0.9% in May and April, 1.0% in March, 0.7% in February and 0.6% in January, according to FSSS.(see Table 1 in Appendix) Inflation in August coincided with analysts' expectations.

During the last week of November 2014 consumer prices in Russia rose by another 0.3%, according to FSSS. From the beginning, they had an accumulated increase of 8.5%, which made it virtually impossible for the Ministry of Economic Development's forecast.

The reasons for such a sharp rise in inflation evidently have political nature connected with the current international situation:

• depreciation of the national currency (jump in the exchange rate: euro at the beginning of the year - 48 rub., US dollar - 35 rub., and in early December euro was already 67.27 rub., US dollar - 54.38 rub.);

• inflation expectations due to the weakening of the ruble;

• crisis in Ukraine;

• introduction of the product embargo to the EU, the United States and Canada;

• sanctions by the EU, the US and Canada;

• a sharp decline in oil prices (from 90-100 dollars. per barrel to 70).

Thus, in 2014 Russia takes the 8th place on the inflation rate in the world.

Ministry of Finance forecast of inflation rate in 2015 is 10% - 17%. The IMF forecast: 10%. Forecast of Central Bank of the Russian Federation: 10.0%.

Monthly inflation rate had fell during first half of 2015 from 3.85% to 0.19%. And then started to increase slowly. The latest statistics provides us with inflation rate of 0.74% in October 2015, which is lower than it was in October 2014. For now the accumulated inflation rate of 2015 is 11.21% which is lower than previous year rate by 0.14% and already higher than the forecast.

The economic situation in Russia in 2015 can be characterized as crisis caused by external shocks: the fall in oil prices and sanctions, which sharply worsened access to global capital markets. Sanctions against Russian banks and companies are expected to continue in future, which implies almost complete absence of loans in European and American markets. This will gradually improve the possibility of borrowing in the Asian markets. The pace of economic recovery in the 2016-2018 will be determined by the effectiveness of adaptation to new environmental conditions, structural reforms and stabilizing measures of economic situation implemented by the government.

Anti-inflationary policy of Russia

Current economic situation and financial markets pose the Russian government and Central Bank of Russia a cumbersome challenge. Geopolitical problems and the deterioration of the external economic environment has become a serious threat to Russia's economic policy. The main aim of the state monetary policy is setting price stability which means maintaining stable low inflation. Price stability is essential for raising and maintaining well-being Russian population, which is the ultimate goal of public policy. Low inflation is the preservation of purchasing power of national currency, that is, the purchasing power of wages and pensions, which is a necessary condition for improving the welfare of people. Low inflation is a predictable environment for long-term planning and future economic decisions. When price is stable people are not afraid to save money and save more in national currency.

From 2015 Central Bank of Russia is following more effective monetary policy targeting inflation. The aim of monetary policy is fall in inflation to 4% in 2017 and maintain future inflation rate near this level. This aim was set taking into account the structural features of the Russian economy and the dynamics of inflation in trade-partner-countries of Russia and is attainable for next 3 years. As a result of unpredictable factors expected rate may deviate from the target point. The range of most probable deviations of inflation from the target level is ± 1.5%.

The Russian policy against inflation mainly has monetary nature, which includes change in base rates of the Central Bank, the regulation of the money supply. The refinancing rate in 2015 remains unchanged and equals 8.25%, the key rate from 3 of August 2015 to 11 of December 2015 - 11.00%. In the case of the further strengthening of inflationary risks the Bank of Russia will continue to increase interest rate.

Administrative - tax impact on inflation evolves gradually, in particular, by moving the tax burden from production to consumption and curbing the growth of tariffs and retail prices.

Another important condition for a sustainable reduction of the growth rate of consumer prices is the formation of inflation expectations at a stable low level. It needs high level of trust to the government and the central bank policy. Trust is achieved not only through reaching the goals, but also through an understanding of ongoing monetary policy. To this end, vision of the current economic situation and forecast of its development, decisions and effects expected from monetary policy should be explained to people.

In connection with a significant change in external conditions Central Bank of Russia revised its forecast of macroeconomic development. In the coming three-year period pace of economic growth will be lower than previously forecasted, due to the persistence of oil prices at a low level.

Following ways can improve the anti-inflationary policy of the Russian Federation:

• The stabilization and strengthening of the ruble exchange rate, measures to increase public interest in the ruble

• Overall price regulation, especially fuel

• Implementation of "counter-cyclical" policy - the dependence of the level of tariffs on the economic growth of the previous year.

• Limiting the growth of prices for gas and electricity. The maximum increase in the cost of municipal services to the population is expected to be 4% in July 2016; 5,1% in July 2017, 4,7% in July 2018.

• Transition to long-term tariff regulation of heating, water supply and drainage system

• Stockpiling of seasonally demanded goods (particularly grain, diesel fuel, etc.)

• Tightening of monetary policy (money contraction due to rising interest rates. In this case, expensive loans are not available).

• Creating a special mechanism with the participation of the Central Bank and Ministry of Finance, which will increase the coherence of activities held by monetary authorities.

• Stimulate competitiveness among national producers supporting small and medium enterprises.

• Improvements in tax system.

Conclusion

Inflation negatively affects all aspects of society. It devalues the results of labor devalues the savings of individuals and entities and prevents long-term investment and growth. High inflation destroys the monetary system, which increases the outflow of financial resources in trade and intermediary operations and accelerates the outflow of capital, resulting in the displacement of national currency by foreign in the internal circulation, undermining the possibility of financing the state budget.

Inflation devalues incomes of workers, especially employed in the public sector, redistributes wealth from the poorest to the richest, thereby increasing the social differentiation of society. Inflation undermines the social and political stability of the society, contributing to the development of authoritarian, dictatorial tendencies.

Russian dynamic of inflation from 2008 to 2015 has 2 upturns in 2008 and 2014. After recovery period, which lasted for 2 years with slightly little change, expansion of Russian economy had been stopped by an unexpected increase in inflation in 2014. Despite continuing high level of inflation Russian policy makers are aiming to reduce inflation rate more than 2 times in following 3 years.

In modern conditions, inflation is caused by monetary and non-monetary factors, and often political. It is impossible to completely eliminate inflation even in a market economy, it only can be controlled. Inflation regulation in Russia is the most important problem of monetary and economic policy. Policy makers should take into account multifactorial nature of inflation. It is based on not only monetary, but also other factors. In order curb inflation processes in Russia, an effective anti-inflationary policy should be held, which consists of the following measures: stabilizing and stimulating production, improvement in tax system, stimulating small and medium enterprises in order to increase competition between enterprises, development of agriculture and conduct protecting policies, stabilizing and strengthening ruble exchange rate, lower expectation of future inflation rate, price regulation, and especially fuel prices, etc. The Central Bank of RF monetary policy is aiming to reduce inflation rate to the target level of 4%.

List of literatures

I. Official documents:

1. The federal law from 10.07.2002 N 86-FZ "On the Central Bank of the Russian Federation (Bank of Russia)"

2. The federal law from 03.12.2012 N 227-FZ "On the consumer basket in the whole of the Russian Federation"

II. Monographs, collective works, collections of scientific works:

3. Abel, Andrew; Bernanke, Ben (2005). "Macroeconomics"5^th ed., Pearson.

4. Chuvakova S.G. Anti-inflationary policy // 2012. - №23. p.44-47.

5. Gontmaher E. Inflation in Russia catches and civilizational landmarks // Free Thought. - 2012. - №10. p.21-23.

6. Michael F. Bryan, "On the Origin and Evolution of the Word 'Inflation'

7. Zadornov S. Ruble Gain Vs Dollar ‘Inevitable,’ , Bloomberg,16.12.2009

III. Articles from periodicals:

8. "Countries Compared by Energy > Oil > Production > Per capita. International Statistics at NationMaster.com". Archived on 2012-04-22.

9. "Understanding Inflation and the Implications for Monetary Policy", Conference Series 53, June 9–11, 2008, Chatham, Massachusetts.

10. Russian economic report (171), World Bank, 2008

11. "Russia", Forbes. December 2013.

IV. Internet-resources:

1.Official website of inflation rate in RF // http://уровень-инфляции.рф

2.Official website of International monetary fund — // http://www.imf.com

3.Official website of Trading Economy //http://www.trandingeconomy.com

4.Official website of Central Bank of Russia — // http://www.cbr.ru

Table 1 Appendix Inflation rate monthly in RF (1991-2015).

Year	January	February	March	April	May	June	July	August	September	October	November	December	Total
1991	6.2	4.8	6.3	63.5	3	1.2	0.6	0.5	1.1	3.5	8.9	12.1	160.4
1992	245.3	38	29.9	21.7	11.9	19.1	10.6	8.6	11.5	22.9	26.1	25.2	2508.85
1993	25.8	24.7	20.1	18.7	18.1	19.9	22.4	26	23	19.5	16.4	12.5	840.03
1994	17.9	10.8	7.4	8.5	6.9	6	5.3	4.6	8	15	14.6	16.4	214.77
1995	17.8	11	8.9	8.5	7.9	6.7	5.4	4.6	4.5	4.7	4.6	3.2	131.61
1996	4.1	2.8	2.8	2.2	1.6	1.2	0.7	-0.2	0.3	1.2	1.9	1.4	21.85
1997	2.3	1.5	1.4	1	0.9	1.1	0.9	-0.1	-0.3	0.2	0.6	1	10.99
1998	1.5	0.9	0.6	0.4	0.5	0.1	0.2	3.7	38.4	4.5	5.7	11.6	84.47
1999	8.4	4.1	2.8	3	2.2	1.9	2.8	1.2	1.5	1.4	1.2	1.3	36.59
2000	2.3	1	0.6	0.9	1.8	2.6	1.8	1	1.3	2.1	1.5	1.6	20.13
2001	2.8	2.3	1.9	1.8	1.8	1.6	0.5	0	0.6	1.1	1.4	1.6	18.82
2002	3.09	1.16	1.08	1.16	1.69	0.53	0.72	0.09	0.4	1.07	1.61	1.54	15.06
2003	2.4	1.63	1.05	1.02	0.8	0.8	0.71	-0.41	0.34	1	0.96	1.1	11.99
2004	1.75	0.99	0.75	0.99	0.74	0.78	0.92	0.42	0.43	1.14	1.11	1.14	11.74
2005	2.62	1.23	1.34	1.12	0.8	0.64	0.46	-0.14	0.25	0.55	0.74	0.82	10.91
2006	2.43	1.66	0.82	0.35	0.48	0.28	0.67	0.19	0.09	0.28	0.63	0.79	9
2007	1.68	1.11	0.59	0.57	0.63	0.95	0.87	0.09	0.79	1.64	1.23	1.13	11.87
2008	2.31	1.2	1.2	1.42	1.35	0.97	0.51	0.36	0.8	0.91	0.83	0.69	13.28
2009	2.37	1.65	1.31	0.69	0.57	0.6	0.63	0	-0.03	0	0.29	0.41	8.8
2010	1.64	0.86	0.63	0.29	0.5	0.39	0.36	0.55	0.84	0.5	0.81	1.08	8.78
2011	2.37	0.78	0.62	0.43	0.48	0.23	-0.01	-0.24	-0.04	0.48	0.42	0.44	6.1
2012	0.5	0.37	0.58	0.31	0.52	0.89	1.23	0.1	0.55	0.46	0.34	0.54	6.58
2013	0.97	0.56	0.34	0.51	0.66	0.42	0.82	0.14	0.21	0.57	0.56	0.51	6.45
2014	0.59	0.7	1.02	0.9	0.9	0.62	0.49	0.24	0.65	0.82	1.28	2.62	11.36
2015	3.85	2.22	1.21	0.46	0.35	0.19	0.8	0.35	0.57	0.74			11.21

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