Poor Man's Inflation Loses Sting in Most Unequal Major Economy
Poor Man's Inflation Loses Sting in Most Unequal Major Economy
(Bloomberg) -- In Russia, the world’s most unequal major economy, the central bank believes it’s helping the have-nots achieve a measure of fairness.
Inflation for the poor has been below or near the price gauge for the rich from the end of 2015, the longest stretch since the Bank of Russia began compiling the data in 2003. Both are now converging on 3 percent, a record-low level the headline annual index hit in September.
The consumer basket for the poor reduces the weight of clothing and shoes and boosts that of basic staples like food, while the one for the rich does the opposite, according to the central bank. In 2005, the cost of living for people on lower incomes was rising 9 percentage points faster than for the well-to-do.
The Bank of Russia hasn’t tailored policies to help those from disadvantaged backgrounds, focusing instead on anchoring inflation expectations across the economy and keeping price growth near its target of “near or around” 4 percent. An unprecedented deceleration has brought inflation to less than a fifth its level two years ago, with the annual index possibly dropping below 3 percent this month for the first time in modern Russian history.
“As inflation consolidates close to 4 percent, the impact of inflation as a factor of social inequality growth will significantly diminish,” the central bank said in its draft policy guidelines for the next three years. “Lower inflation leads to lower difference in the growth of the cost of living ‘for the poor’ and ‘for the rich.’"
Central bankers from Australia to the U.K. have been on the defensive over how their policies have contributed to deeper inequality. Meanwhile, research by the Federal Reserve Bank of St. Louis found that the divide in rich countries still trails that in developing nations. Russia’s central bank says the less well-off suffer disproportionately during periods of high price growth because the cost of essentials tends to grow faster than for other goods. What’s more, people on lower incomes can’t easily adjust their consumption basket since it’s already full of the cheapest products bought in minimal amounts.
By making some headway in combating poverty in Russia, the central bank is easing the path for President Vladimir Putin to run for another term, which he’s widely expected to do in March. While policy makers can do little about such root causes as access to education or corruption and red tape that stifle small business, it’s perceptions that count.
Inflation, which has for years topped the list of concerns for most people, is starting to lose its political bite. A September poll showed that only 12 percent of Russians consider high price growth the biggest problem facing the country, tied for third place and down from 20 percent at the start of 2016.
Still, two years of recession and a currency crisis have left every seventh Russian living below the subsistence level. Allowing inflation to get out of control after the Soviet Union broke up in 1991 created the conditions in which poverty has festered ever since. In Russia, 89 percent of all household wealth is in the hands of the richest 10 percent, a higher share than in the U.S. and China, Credit Suisse Group AG said in its latest Global Wealth Report.
“Given the enormous inflation of the 1991-1995 period, Soviet-era savings were worth close to nothing by the late 1990s,” French economist Thomas Piketty and two co-authors said in a paper published this August. “There is no doubt that hyper-inflation played a key instrumental role in the collapse of bottom incomes.”
The Bank of Russia last year drew attention to the widening rich-poor divide for the first time, pointing out that its ability to keep inflation in check weakens with the disappearance of middle-income households, considered the most sensitive to interest rates and prices. Its draft guidelines now devote a separate appendix to explain how inflation affects different income groups.
Inflation for the poor and the rich will be “close” to one another, with the trend expected to remain in place over the forecast horizon of the next three years, the central bank’s press office said in an emailed response to questions.
As the experience of developed economies shows, however, stable and low inflation might be a necessary condition for narrowing the wealth divide, but is by no means sufficient by itself. Meanwhile, for subdued inflation to have a positive impact in Russia, it needs to translate into gains for the economy, according to Natalia Orlova, chief economist at Alfa-Bank JSC.
“Despite the success in slowing inflation down, the share of the middle class in Russia won’t grow,” and it’s this group that will bear the brunt of likely tax increases in the coming years, Orlova said. “For the middle class to grow, what’s needed is economic expansion, alongside a program to accelerate it. That’s still lacking.”
--With assistance from Paul Abelsky
To contact the reporter on this story: Olga Tanas in Washington at otanas@bloomberg.net.
To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net, Paul Abelsky, Tony Halpin
©2017 Bloomberg L.P.