Central Bank analysts consider targeted assistance to the poor as a more effective tool to fight inflation than price regulation

Direct regulation of prices allows you to stop their growth, but only in the short term. Subsequently, this will create imbalances in the commodity markets and may entail negative consequences for regulated industries and the economy as a whole. This opinion was expressed by analysts of the Central Bank in the report “Price regulation: when to stop?” At the same time, the authors point out, the content of the analytical note may not coincide with the official position of the Central Bank.

Analysts believe that from a social and economic point of view, a more preferable alternative to price regulation may be the provision of targeted material assistance to the poorest segments of the population.

As noted, one of the reasons for the increase in inflation in Russia was the rise in world prices for food and raw materials. Measures to regulate domestic prices, adopted by the Cabinet, have reduced their sensitivity to world dynamics. But in the medium and long term, “direct government intervention in the pricing process creates imbalances” in the commodity markets.

Among the negative consequences, analysts name: a reduction in investment in the production and release of goods, prices for which are regulated, and as a consequence – a slowdown in the growth of regulated sectors of the economy; increased risks of deficit and growth in the volume of shadow trade, and the costs of the state to combat it also increase. In addition, they point to the distortion of price signals, increasing the influence of pro-inflationary factors and creating the preconditions for a steady rise in inflationary expectations.

According to experts, price regulation is designed to close “market failures” due to the inability of market mechanisms to bring prices into balance, but due to the inability to avoid imbalances in price intervention, negative long-term effects outweigh positive short-term ones.

Artificial price regulation creates a bias in the market towards consumers and can protect against price spikes. But producers in this case lose incentives for development, there may be a shortage or a black market for goods. If the growth in prices for regulated products is stable, interference in pricing makes it difficult to adjust supply and demand to the increased price level. In such a situation, targeted support for vulnerable consumer groups may become a more effective response to price increases: it compensates for “market failures,” but does not cancel the effect of market mechanisms.

Moreover, such a measure introduces significantly less distortions in the dynamics of economic activity, inflation and inflation expectations, analysts are sure.

In turn, the chairman of the Bank of Russia Elvira Nabiullina said that inflation in Russia at the end of 2021 may be “slightly higher” the upper limit of the Central Bank’s forecast. Recall that the Central Bank’s forecast is 7.4-7.9%.

“At the end of the year, inflation in our country is highly volatile, the last weekly data moved along a sinusoid – either higher or lower than seasonal values. Therefore, in December, these volatile one-time factors may affect the end point – yes, inflation may be slightly higher than the upper limit of our forecast of 7.9%, it may well happen, “Ms Nabiullina told RIA Novosti.