The government’s overall economic objective is to promote sustained economic growth in the total output by establishing a stable economic environment for business, based on low and stable price inflation. The government argues that without this, uncertainty will stifle business and employment opportunities, and businesses will be discouraged from investing for the future and developing the products on which Russia’s prosperity depends.
It is argued that high and volatile price inflation of the kind experienced during the 1990s destroyed jobs, stifled economic growth, and increased the demand for imports from countries with lower price inflation than Russia, thereby causing a Government economic objectives balance of payments deficit.
Inflation may be defined as a general and sustained rise in the prices of goods and services. It is measured by calculating the percentage increase in the price level over successive time periods – per month, or per year. The Retail Price Index (RPI) is the main ‘headline’ measure of price inflation. It expresses the percentage change in the average level of prices of a ‘basket’ of some 600 different goods and services, in terms of movement in a single number series. The goods and services in the ‘basket’ are selected as representative of Government economic objectives those purchased by the ‘average’ household, based on a sample of 7,000 households. Approximately 150,000 price quotations are recorded each month by government statisticians from a large number of retail outlets across the country.
In the base year, the average price of the RPI basket is assigned the number 100. If, on average, the price of the basket increased by 10% the following year, the RPI will be calculated as 110. If, over the next year, the average price of the basket rises by 12%, the RPI will be recorded as 123.2.
The Producer Price Index (PPI) is calculated from the price movements of approximately 11,000 materials Government economic objectives and products purchased and manufactured by industry. Increases in material prices paid by producers are likely to feed through to retail prices after a time lag.
The government argues that low inflation – and the confidence that it will be kept low – is essential for better economic performance and improved competitiveness. This is because:
Inflation distorts the price signals in markets on which firms base their decisions about what goods and services to produce. Changes in relative prices become confused by general inflation. Even with general price inflation of only 5% per year, prices double every 14 years.
High inflation creates uncertainty, which Government economic objectives leads to reduced business investment in new plant and machinery – the engine of future economic growth. If firms are unsure about future prices and levels of inflation, they will be less willing to take risks and invest in long-term projects.
High inflation relative to other countries reduces demand for Russia’s exports, but increases the demand for cheaper overseas imports in Russia, thereby destroying jobs at home.
High inflation erodes the purchasing power of money. People are able to buy fewer goods and services than they did before, and so demand for goods and services tends to fall Government economic objectives. As the purchasing power of money falls, lenders of money push up interest rates to compensate. Savers will also demand higher interest rates to protect the value of their savings. As interest rates rise, borrowing becomes more expensive for consumers and firms.