R-ECOMONY, 2018, 4(2), 41–45 doi: 10.15826/recon.2018.4.2.006 41 www.r-economy.ru Online ISSN 2412-0731 Original Paper FOR CITATION Kiseleva, P. S. (2018) Regional inflation in Russia and ways of controlling it. R-economy, 4(2), 41–45. doi: 10.15826/recon.2018.4.2.006 FOR CITATION Киселёва, П. С. (2018) Инфляция в регионах России и пути её контроля. R-economy, 4(2), 41–45. doi: 10.15826/recon.2018.4.2.006 doi 10.15826/recon.2018.4.2.006 Regional inflation in Russia and ways of controlling it Polina S. Kiseleva Ural Federal University, Ekaterinburg, Russia; e-mail: p.s.kiseleva@urfu.ru ABSTRACT The article focuses on regional inflation in Russia, showing that there are in- dependent regional factors shaping inflation and that there are considerable discrepancies between the levels of regional and national inflation. There is a need for more effective anti-inflationary policy to ensure stable social and economic development of the country and its regions. The problem, however, is that the instruments of anti-inflationary policy targeted at one type of infla- tion may act as triggers for another type of inflation. Therefore, for a success- ful anti-inflationary policy we must first identify the factors that contribute to the development of inflation. Otherwise, the anti-inflation measures may cause a rise in prices rather than help the government maintain them at a lower level. We carried out correlation analysis of the interrelation between the consumer price index and inflation rates over the past few years and found that the cost-related factors play a key role in the inflationary processes in Russia and its regions. Therefore, a conclusion was made that monetary meth- ods alone are ineffective to control inflation and recommendations were given for improving regional anti-inflationary policies. KEYWORDS inflation, regional inflation, cost factors, natural monopoly, anti-inflationary policy Инфляция в регионах России и пути её контроля П. С. Киселёва Уральский федеральный университет, Екатеринбург, Россия; e-mail: p.s.kiseleva@urfu.ru РЕЗЮМЕ Статья фокусируется на региональной инфляции в России и демонстри- рует, что существуют независимые региональные факторы, формиру- ющие инфляцию, и что существуют значительные расхождения между уровнями региональной и общенациональной инфляции. Существует необходимость в более эффективной антиинфляционной политике для обеспечения стабильного социально-экономического развития страны и ее регионов. Политика усложняется тем, что инструменты антиин- фляционной политики, ориентированные на один тип инфляции, могут вызывать другой тип инфляции. Поэтому для успешной антиинфля- ционной политики вначале необходимо определить факторы, которые способствуют развитию инфляции. Иначе антиинфляционные меры могут привести к росту цен, а не к их удержанию на низком уровне. В статье был проведен корреляционный анализ взаимосвязи между индексом потребительских цен и темпами инфляции за последние не- сколько лет и было обнаружено, что факторы, связанные с затратами, играют ключевую роль в инфляционных процессах в России и ее регио- нах. Поэтому был сделан вывод о том, что одни лишь денежные методы неэффективны для борьбы с инфляцией, и были даны рекомендации по совершенствованию региональной антиинфляционной политики. КЛЮЧЕВЫЕ СЛОВА инфляция, региональная инфляция, факторы издержек, естественная монополия, антиинфляционная политика Introduction Inflation is one of the most acute problems in Russia as it affects the national economy as a whole and individual economic entities. The level of inflation, therefore, is one of the key macroeco- nomic indicators since it has a direct impact on the cost and quality of life in the country. Inflation makes calculations more complex and, therefore, leads to mistakes and inaccuracies in financial planning of households and business entities [1]. Even a moderate 5% annual inflation is likely to result in doubling of prices in about 14 years. With the creeping inflation of 11.35%, typical of Russia in 2014, the overall price level http://doi.org/10.15826/recon.2018.4.2.006 http://doi.org/10.15826/recon.2018.4.2.006 42 www.r-economy.ru R-ECOMONY, 2018, 4(2), 41–45 doi: 10.15826/recon.2018.4.2.006 Online ISSN 2412-0731 will increase more than 4.5 times in the same pe- riod while the inflation which reached the level of 13% in 2015 will lead to a six-time increase in the general price level1. The above-described situ- ation makes saving and implementing long-term investment projects particularly difficult. The study of regional inflation reveals dis- crepancies in the rates of inflation across Russian regions. We need to identify those regional factors that affect inflation in order to avoid inflationary outbursts in regions and develop an efficient an- ti-inflationary policy. Types and characteristics of regional inflation in Russia Social and economic development of Russian regions is increasingly uneven and there are con- siderable discrepancies between inflation rates in different regions [2]. In particular, in 2017, the highest level of inflation was recorded in the Re- public of Sakha (Yakutia) – 4.44%, and the low- est – in Dagestan, 1.12%. In 2016, the highest in- flation was in the Khanty-Mansiysk Autonomous District (Yugra) – 8.52%, and the lowest, in In- gushetia – 2.6%2. Even more significant differentiation of infla- tion rates was observed in 2015. At the end of 2015, the highest inflation was found in the Republic of Crimea – 27.64% (26.4% in the Crimean Federal District), which is more than twice as high as the federal inflation rate (12.91%)3. It should be noted that in the case of the Crimea, high inflation stems from the fundamental changes in the region’s economy, in particular, its integra- tion into the larger economic space. As a result, the Crimea turned into another subsidized region of Russia. In 2016, the Crimea project was allocated over 40 billion rubles worth of gratuitous revenue from the federal budget, including the subsidies ex- ceeding 20 billion rubles intended to equalize the budgetary security4. Regarding the amount of gra- tuitous payments, the Crimea ranks fourth among 1 Our calculations are based on the data provided by the official website of the Federal State Statistics Service. Retrieved from http://www.gks.ru. 2 Our calculations are based on the data provided by the official website of the Federal State Statistics Service. Retrieved from http://www.gks.ru. 3 Our calculations are based on the data provided by the official website of the Federal State Statistics Service. Retrieved from http://www.gks.ru. 4 Official website of the Ministry of Finance of the Russian Federation. Retrieved from http://minfin.ru; Official website of the Ministry of Finance of the Republic of Crimea. Retrieved from http://minfin.rk.gov.ru. other Russian regions, following Dagestan, Sakha (Yakutia) and Kamchatka5. The lowest level of inflation in 2015 was re- corded in Khakassia (10.33%), the highest (exclud- ing the Crimean Federal District), in Ingushetia (17.54%). Such statistics show significant discrep- ancies in the rates of price growth across different regions. Similarly, a significant differentiation of inflation rates was observed in the previous peri- od. In particular, in 2014, the inflation rates ranged from 7.46% in the Yamalo-Nenets Autonomous District to 15.6% in Kaliningrad region6. Regional inflation requires the government to adjust its social and economic policies on the federal and regional levels, including the anti-in- flationary policies. Our analysis shows that the cost factors play a key role in inflation processes [3]. If we take a closer look at the dynamics of consumer inflation and price indices (tariffs) of natural monopolies, we will find that these indi- cators are closely connected and, consequently, that non-monetary factors shape inflation in the entire country as well as in specific regions. The dynamics of quarterly indicators is es- pecially remarkable in this respect because it al- lows us to take into consideration the time lag of the impact that various factors have on consum- er inflation. Moreover, the analysis of quarterly indicators over the past decade has revealed the following pattern: the highest level of inflation is observed in the quarter characterized by an increase in tariffs of natural monopolies. For ex- ample, until 2012, the increase in electricity and heating tariffs as well as utility tariffs occurred in the first quarter (in January), and the highest rate of inflation was also observed in this quarter (Table 1). Since 2012, however, there has been an increase in tariffs in the third quarter, which was also characterized by the highest inflation. The above-described pattern characterizes only national economy but also specific regions, for example, Sverdlovsk region [4]. In order to ensure long-term price stability, in addition to looking at the regional inflation factors, we should address the problem of the disproportional development of the country’s economic space. At present, there are consider- able differences in the development of Russian regions in the main macroeconomic indicators. 5 Official website of the Ministry of Finance of the Russian Federation. Retrieved from http://minfin.ru. 6 Our calculations are based on the data provided by the official website of the Federal State Statistics Service. Retrieved from http://www.gks.ru. http://doi.org/10.15826/recon.2018.4.2.006 http://www.gks.ru http://www.gks.ru http://www.gks.ru http://minfin.rk.gov.ru http://minfin.ru http://www.gks.ru R-ECOMONY, 2018, 4(2), 41–45 doi: 10.15826/recon.2018.4.2.006 43 www.r-economy.ru Online ISSN 2412-0731 Therefore, it is advisable to adjust regional poli- cies in order to make the socio-economic deve- lopment more balanced. The growing tariffs on the products of natural monopolies serve as the main catalyst for region- al inflation and affect the consumer price index [4]. At the same time, in combination with high freight rates and monopolistically inflated fuel prices, tariffs influence the cost of regional pro- duction, increase production cost inflation and are detrimental for local businesses. Therefore, monopolistically inflated prices cause a rise in the general price level, thus exacerbating imbalance in industry as certain sectors by virtue of their mo- nopolistic positions get super-profits while others have to make zero profits or even suffer losses. Anti-inflationary policy in Russia: methods and approaches Discrepancies in regional economies are caused by the deviation of regional inflation rates from the national rate. The problem of regional imbalances regarding tariffs for housing and com- munal services needs to be addressed through state policies that would enable federal bodies to create their own territorial bodies to regulate tar- iffs. These territorial bodies should be authorized to conduct operational analysis of regional com- panies’ activities. It is also necessary to create a single executive body responsible for the development and imple- mentation of the pricing policy as well as vertical agencies regulating tariffs and monitoring compa- nies’ compliance with the established pricing pro- cedure. Moreover, we recommend to introduce a unified network system of price monitoring. Since Russian economy is characterized by substantial unloaded production capacities and the declining production, the aggregate demand should be stimulated by increasing investment through tax cuts and the key interest rate. The current tax policy is unstable and does not con- tribute to the country’s innovative development. It is possible to make the country’s econo- my more efficient by reducing the tax burden on producers’ incomes, including taxes on wages, profits and added value. Furthermore, it is nec- essary to exempt from taxation the profit that en- terprises direct for real investment. Taking into account the peculiarities of national economy, such policy may reduce the average production costs and increase the aggregate demand with- out a significant increase in the general price level. Decreasing average production costs can be effective in the conditions of cost inflation, which prevails in national and regional econo- my and should be distinguished from demand inflation. Fears of a rise in the general price level due to the increase of the aggregate demand are unjus- tified in the current economic conditions. First, as we have noted above, the development of infla- tionary processes in national and regional econo- my is mostly caused by cost factors, and therefore, we can conclude that cost inflation prevails in the country. Secondly, national economy at the cur- rent stage of its development is characterized by incomplete employment, unloaded production capacities and declining production. Consequently, an increase in the aggregate demand in the current economic conditions will not have negative consequences, but, on the con- trary, will be beneficial for economy. In addition, there is evidence that an increase in wages entails an increase in the average annual GDP while in- flation remains at the same level [5, pp. 144–156]. GDP growth is associated with an increase in la- bor productivity, which has a greater impact on the volume of production of goods and services, which, in turn, leads to lower prices. Therefore, in Russian economy, inflation does not increase with the growth of the population’s income [5, pp. 155]. To address the problem of cost inflation and stimulate business activity, another effective meth- od is to reduce tax rates, which will reduce the overall prices level. This measure is favoured by Table 1 Consumer price index in the Russian Federation in 2005–2015, % of the previous period Quarter 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 I 105.27 104.98 103.42 104.78 105.42 103.16 103.81 101.46 101.89 102.32 107.44 II 102.72 101.18 102.24 103.96 101.98 101.23 101.19 101.75 101.63 102.50 101.08 III 100.62 101.01 101.86 101.82 100.65 101.84 99.70 101.95 101.22 101.45 101.88 IV 102.31 101.83 104.35 102.72 100.75 102.55 101.40 101.41 101.73 105.08 102.51 Souse: Calculations were based on the data from the official website of the Federal State Statistics Service. Retrieved from http://www.gks.ru. http://doi.org/10.15826/recon.2018.4.2.006 http://www.gks.ru 44 www.r-economy.ru R-ECOMONY, 2018, 4(2), 41–45 doi: 10.15826/recon.2018.4.2.006 Online ISSN 2412-0731 the proponents of the theory of supply econom- ics. V. V. Roshchupkin points out that excessive tax burden can stem from the inefficiency of the tax system [6, pp. 140]. Thus, mitigation of the tax burden, for example, a partial tax relief will allow enterprises to use their profits for real investment, which will contribute to the growth of econom- ic activity. By increase the aggregate supply, this measure will help the government deal with cost inflation, which is a dominant type of inflation in Russian economy. From the diversity of anti-inflationary pol- icy models, we should choose only those that are aimed at combating the underlying causes of inflation in the economy of a given country. Different economic schools propose different approaches to the interpretation of the phenom- enon of inflation and the assessment of econom- ic conditions, which creates a great diversity of views on what course an anti-inflationary policy should take. Recently, the need to introduce inflation targeting in Russia has been actively discussed. However, in the conditions of the current eco- nomic recession and high unemployment, this method will not be effective, since keeping in- flation at bay should not be an end in itself of the economic policy. In addition, there is no evidence that inflation targeting has a positive impact on the dynamics of production output, neither in the short-term nor in the long-term [7, pp. 107–128]. The same study shows that in developing countries inflation targeting might negatively affect the production output. It should be noted that there is still no clear understanding of how to safely and effectively apply the instru- ments of inflation targeting [8]. Empirical studies on different countries show that in recent years the effect of ex- change rate transfer on inflation has subsided [9, pp. 924–947]. Nevertheless, in Russian econ- omy there is a reverse trend: fluctuations in the ruble exchange rate have a strong negative effect on the dynamics of consumer prices, especially in the food sector. In Russia, in the recent years, consumer prices have become more responsive to changes in exchange rates [10]. D. Mihaljec and M. Klau also demonstrate that in developing countries, the impact of the na- tional currency on the development of inflationary processes is stronger than in developed countries [11]. Therefore, it is required, on the one hand, to take measures aimed at strengthening the ruble, and on the other hand, to mitigate the influence of the exchange rate dynamics on inflation. It should be noted that the latter effect is strengthened by inflationary expectations. According to B. P. Bosworth, cost factors play the main role in regional inflation, which means that it is necessary to take into account its non-monetary nature and to reduce the inflation of costs [12]. Thus, to maximize the effect of an anti-infla- tionary policy it is necessary to apply an integrat- ed approach: stimulate national production and business activities, which will contribute to the growth of the aggregate supply, and at the same time control the increase in the aggregate demand as a factor of economic growth. It is necessary to strengthen control over natural monopolies’ tariffs, which requires some serious institutional changes. In addition to controlling pricing at the federal level, tariffs should also be regulated on the regional level. More balanced economic development across the regions will enhance the development of the national market and strengthen the unity of the Russian state. Increasing interregional differenti- ation, on the contrary, makes it difficult to imple- ment a comprehensive social and economic policy successfully, including an anti-inflationary policy. A number of theoretical models prove that inflation can have a negative impact on the mar- ket structure, long-term relationships and their efficiency. R. Benabou and M. Tommasi de- scribe the mechanisms of inflation that may lead to considerable expenses [13; 14]. The extreme cases of lower inflation are the disastrous con- sequences of hyperinflation. Furthermore, there is a negative interrelation between inflation and investment [15; 16]. Conclusion A successful anti-inflationary policy requires the government to adopt an integrated approach to the problem. Given the prevailing type of in- flation and the current economic conditions, the government’s priority should be the stimulation of domestic production and those business ac- tivities that contribute to the growth of aggregate supply. It is also necessary to maintain control over the increase in the aggregate demand as a factor of economic growth. We need serious in- stitutional changes in the sphere of natural mo- nopolies in order to establish more rigorous con- trol over their tariffs. http://doi.org/10.15826/recon.2018.4.2.006 R-ECOMONY, 2018, 4(2), 41–45 doi: 10.15826/recon.2018.4.2.006 45 www.r-economy.ru Online ISSN 2412-0731 Based on our analysis of the characteristics of the country’s economic development and the predominant type of inflation, we would recom- mend to apply the Keynesian theory and the the- ory of economic proposals to develop a national economic policy. It would, however, be difficult to combine these two approaches as the former seeks to regulate the aggregate demand while the latter, the aggregate supply. Nevertheless, taking into consideration the current state of Russian econ- omy, we have reasons to expect these measures to be quite efficient. References 1. Modigliani, F. & Cohn, R. A. (1979). Inflation and the Stock Market. Financial Analysts Jour- nal, 35, 24–44. 2. Kiseleva, P. 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Tommasi, M. (1994). The Consequences of Price Instability on Search Markets: Toward Un- derstanding the Effects of Inflation. American Economic Review, 84(5), 1385–1396. 15. Easterly, W. & Bruno, M. (1998). Inflation Crises and Long-Run Growth. Journal of Monetary Economics, 41(1), 3–26. Retrieved from https://ssrn.com/abstract=123168. 16. Fischer, S. (1993). The Role of Macroeconomic Factors in Growth. Journal of Monetary Eco- nomics, 32(3), 485–512. doi: 10.3386/w4565. Information about the author Polina S. Kiseleva – Senior lecturer of the Department of Economic Theory and Economic Pol- icy, Ural Federal University University (19, Mira St., 620002, Yekaterinburg, Russian Federation); email: p.s.kiseleva@urfu.ru. http://doi.org/10.15826/recon.2018.4.2.006 http://doi.org/10.1016/j.jimonfin.2006.12.003 http://doi.org/10.2307/1991726 http://doi.org/10.2307/2297956 https://ssrn.com/abstract=123168 http://doi.org/10.3386/w4565 mailto:p.s.kiseleva@urfu.ru