Representatives of the Russian Central Bank for the first time mentioned the threat behind a slow decline of inflation in Russia. The domestic inflation calculated by experts has stabilized, but at a level above 4%.
Thus, the Bank of Russia supported the Ministry of Economy's and the Ministry of Finance's intention to reduce labor costs in the economy.
The Bank of Russia's Research and Forecasting Department issued an analytical brief of the Central Bank economist Alexey Ponomarenko titled 'Domestic economic factors of inflation'.
The document made public calculations of domestically generated inflation (DGI) in relation to the consumer price index (CPI) and the trend inflation calculated by the Central Bank. DGI reflects the growth in domestic costs, which are less exposed to external factors and import price fluctuations. Domestic inflation, which was higher than consumer inflation since 2003, has stabilized in 2014 at the level of 6-8%, which is much higher than the Central Bank's Inflation target in 2017 — 4%.
According to another calculation of future inflation, monetary inflation is expected at 8%, which is higher than the consumer price index. The main conclusion of analysts is that the inflation rate of 4% in 2017 cannot be guaranteed, even without external shocks.
According to the Central Bank experts, high unit labor costs have a negative impact on the consumer inflation. In the Central Bank's forecast the GDP growth in 2019 will be at 4.5% per annum may be partly realized by restricting wage growth in 2017 and by corporate profits growth in 2018-2019, which will be invested into the Russian economy.
Thus, the fact that, according to the Central Bank, the persistent unit labor costs will prevent achieving the inflation target, is a serious argument in support of the positions of the Ministry of Finance and the Economy Ministry.
However, no one is going to set any administrative restrictions on wages in the private sector, because the labor market in the Russian Federation is traditionally determined by salaries in budget organizations. If the growth of real pensions and salaries in the government and public sectors is frozen, the Ministry of Finance will get a chance to reduce the budget deficit.
An associate professor of Stock Markets and Financial Engineering of RANEPA, Vasiliy Yakimkin, disagreed with the Central Bank analysts. "The purchasing power will decline even more, if they limit the incomes of Russians, and it is already close to zero. The most important thing for Russia now is to develop internal demand. How can you develop domestic demand if you limit salaries and other incomes of the population?" the expert asks.
He agreed with a negative outlook on the inflation, which can stay in the range of 6-7%, but emphasized that the restriction of incomes of the population won't save the situation. "As long as there is a steady trend of the growth of natural monopolies tariffs, it is impossible to talk about the inflation of 4%, because it will be limited by the growth of tariffs. If the tariffs grow by 7% per year, respectively, the inflation rate will not fall below 7%," Yakimkin said.
"So now we need to focus efforts to reduce tariffs of natural monopolies," an associate professor of Stock Markets and Financial Engineering of RANEPA stressed.
A professor of the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, expressed doubt that the additional profit corporations will receive as a result of freezing salaries will be aimed at the investment.
According to the expert, the proposals of the authorities to limit wages, increase social taxes, introduce additional pensions and increase the income tax are not intended to encourage investments and reduce inflation. "Rather, it is camouflaged increase of the tax burden on personal incomes of citizens," he explained.
"I think that the impact of these measures will be indirect. The main problem here is to balance the budget and justify the introduction of high taxes," Alexander Abramov concluded.
