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As suspected, the political response to high food prices is to assist with government funding.
Yes, it’s inflationary, but politically there is little choice.
In the case of a relatively rich exporter of energy like Russia, they are helping their citizens outbid poorer nations for food:
by Gleb Bryanski
(Reuters) Russian Prime Minister Vladimir Putin has said he will hike wages, pensions and social benefits to compensate people for rising prices and smooth the effects of anti-inflation policy.
“Through raising wages, pensions, social benefits and subsidies we will try to minimise negative consequences of our anti-inflation policy for the people,” Putin said in an interview with the French Le Monde daily attended by Reuters and released on Saturday.
Missing the annual inflation target by a wide margin has become the biggest policy failure of Putin’s last year as president in 2007 and is likely to turn into a major headache for his cabinet this year.
In his nomination speech in parliament this month, Putin said he was prepared to tolerate double-digit inflation for a few years. His cabinet has yet to present a comprehensive anti-inflation policy.
Putin said his cabinet was aware of inflation dangers and kept a close call on the situation. Inflation is running at 15 percent, making the cabinet’s goal of 10.5 percent for this year unlikely to be attained.
Seems Putin isn’t as worried about inflations as various critics would like him to be.
Russia’s inflation is a result of global food price rises but also a consequence of capital inflows from abroad as well as lavish budget spending ahead of parliamentary and presidential elections last year.
A more prudent budget policy would have helped Russia curb price growth this year but Putin signaled he was not yet prepared to risk his high popularity ratings. “We understand that this (rising wages) means an inflow of money into the economy but we are simply obliged to do it and we will do it,” Putin said.
Yes, politicians do respond to popularity ratings, and Putin is one of the best.
As I’ve written before, don’t underestimate Putin:
Wages grew by 28 percent year-on-year in April and some officials have warned that Russia risks falling into an inflationary spiral as Latin American countries did in the 1990s and have said that wage controls could be necessary.
Food makes up over 40 percent of the basket of goods and services used to calculate Russia’s consumer price index (CPI), a typical feature for poorer nations where the population spends a large proportion of income to feed themselves.
“We understand that food price growth hits those of our citizens who have low incomes. The share of their family budgets spent on food is big,” said Putin.
Putin, who is still coming to grips with his new role as premier, mentioned a recent rise of the refinancing rate — a symbolic ceiling of official interest rates hardly used in practice — among anti-inflation measures.
The central bank has little leverage over the economy, swelled with petrodollars, with its interest rate policy, but the market takes guidance from its deposit and repo rates rather than the refinancing rate.
Echoing his foreign policy statements, Putin blamed the West for Russia’s inflation problem too: “Inflation has been exported to Russia from developed economies, including Europe,” he said.
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