- distortion of price signals, intensifying the influence of pro-inflationary factors and creating the preconditions for a steady rise in inflationary expectations.
Other countries that regulate prices in certain markets also faced the problem of complicating the analysis of the price situation.
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Difficulties for the Central Bank due to price regulation
Price regulation is designed to close “market failures” due to the inability of market mechanisms to bring prices to equilibrium, analysts from the Bank of Russia explain. There are more grounds for government price regulation of “market failures” in economies in which the competitive environment is underdeveloped and in which monopolistic companies prevail. However, due to the impossibility of avoiding imbalances when intervening in pricing, the negative long-term effects outweigh the positive short-term ones, the Central Bank concludes.
In addition to direct price regulation, when the marginal cost of a commodity that has risen in price is introduced (in Russia, prices for sugar and sunflower oil were so limited), there are indirect mechanisms, for example, export duties (they were introduced for grain, oil products, metals, fertilizers and a number of other goods). But such mechanisms require constant fine-tuning to balance short-term pro-inflationary risks and medium- and long-term risks for investment and production, according to analysts at the Central Bank. “The example of price regulation in the oil products market shows that indirect measures help smooth out fluctuations in domestic prices, but cannot protect against the rise in world prices over long periods of time,” they concretize. Despite the existing damper mechanism, fuel continues to rise in price in Russia.
Government price containment works to combat short-term shocks, agrees Natalia Orlova, chief economist at Alfa Bank, but inflation continues to deliver negative surprises. “Price control measures were introduced in 2020 when inflation was lower and threats seemed temporary. But now it is already clear that we are dealing with a long-term upward trend in inflation, and here it is impossible to solve monetary problems in non-monetary ways, ”she emphasizes. “For the Bank of Russia, state regulation of prices complicates its work: it loses information about real inflation and cannot adequately build the level of the interest rate.”
The head of the Central Bank Elvira Nabiullina spoke at the St. Petersburg International Economic Forum that the economy should not “work on duties and dampers.” In response to her remark, Finance Minister Anton Siluanov objected that market mechanisms are used in price regulation.
Targeted payments instead of price management
Artificial price regulation creates a bias in the market towards consumers and can protect against sharp price surges, the Central Bank points out. 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.
“This form of support introduces significantly less distortions in the dynamics of economic activity, inflation and inflation expectations. This is important for maintaining sustainable economic growth at a rate that meets its potential, ”the authors of the analytical note are convinced.
Instead of containing prices, the head of the Accounts Chamber, Alexei Kudrin, advocated targeted support of the population. In an interview with RBC in August, he said that he was wary of government measures to regulate prices. “When there is a shock or peak of a negative phenomenon, it is possible and reasonable. But the effect of such measures within three or four months is already fraught with other imbalances, ”he warned. According to him, a substitute for this method can be targeted subsidies or discounts for the purchase of certain goods for especially needy categories of citizens.
The resumption of the discussion about an alternative to state regulation of prices at the suggestion of the Central Bank right now may be associated with the launch of the digital ruble, Orlova suggests. “Next year, a pilot project of the digital ruble will be launched, which will potentially simplify the payment of targeted social benefits. This is how the regulator accelerates the implementation of the project, ”she suggested.
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