Russian inflation at 18-month low

Tariff caps on monopolies are cutting inflation

Russian inflation rose just 0.5% in July, the lowest monthly rate since the beginning of 2000, as food prices fell and government plans to squeeze inflation began to take hold.

The modest rise followed a larger jump of 1.6% in June.

The monthly rate has slid slightly each month since January, in which inflation was 2.8%.

Taken together, prices have risen 13.2% for the year to date, up slightly on the performance the previous year.

Monthly inflation in 2001

July: 0.5%

June: 1.6%

May: 1.8%

April: 1.8%

March: 1.9%

February: 2.3%

January: 2.8%

Fresh food is always cheaper at this time of year, as the harvest begins to push fresh supplies into markets. Prices fell 0.3% after rising 1.9% in June.

But also weighing on inflation was a government decision earlier this month to cap tariffs charged by Russia's network of private monopolies, covering industries including gas, power, and the railways, until the end of the year.

And reductions in the supply of roubles to the economy have also had an effect, after months of printing money to buy dollars and weaken the local currency to make local companies more competitive.

Natural monopolies

At a news conference following a cabinet meeting last week German Gref, the economic and trade minister, told reporters that tariff rises had accounted for 38% of retail inflation the previous year.

Gref: barring emergencies, monopolies must cap prices

"A decision that tariffs of natural monopolies will be adjusted only in emergency situations was made," he said.

The aim is to keep inflation down to levels close to the government's annual target of about 18%. In 2000 the annual rate was about 20%.

But the government of Vladimir Putin also wants to force efficiency savings on the big monopolies, which passed into the hands of so-called "oligarchs" when privatised when Boris Yeltsin was president.

"These tariffs can't be held at these levels indefinitely, because they're not economic," said John Lomax, equity strategist at HSBC, which expects annual inflation to stay around 20% this year.

Savings

The tariff reductions mean the monopolies are effectively subsidising the economy, he said, and one - UES, which controls power supplies - has already had trouble raising short-term finance.

So what the government hopes to do is make the monopolies look for savings before they are allowed to raise tariffs again, as part of broader economic reforms.

Both Gazprom and UES have had new management this year as part of the effort to bring them in hand.

According to Mr Lomax, Putin has a tough job managing economic reforms. With wages of Russia's workers at rock-bottom levels, hurt by years of rampant inflation and a shrinking economy, natural monopoly prices cannot be allowed to go too high.

"We've had endless amounts of pain for the Russian working class," he said. "Putin has a difficult tightrope to walk, but he's not doing too badly."

Other triggers for the low inflation rate included fuel prices, which slid 0.8% in line with world trends.

Services rose 2.0% in July, compared with 2.5% in June, while non-food goods were up 0.5% after rising 0.6% in the previous month.

Food and services have seen prices accelerate in the first half of the year compared with a year earlier, with increases for the six months from January to June of 14.1% and 21.1%, compared respectively with 8.7% and 15.2% in the same period last year.