- What policy should central banks pursue to curb inflation?
‘Today’s world regards high inflation as an inevitable phenomenon for a market economy and quite dangerous for the development of states. Inflation leads to impoverished population, undermines social stability, provokes domestic economic crises and political conflicts.
On the other hand, zero inflation can also be detrimental for the economy, as banks and households will have no incentives whatsoever to invest in industry, services, or agriculture. When the prices for all goods are stable, then it feels safer to keep one’s savings in a bank account or ‘under the matrass’ instead of risking through investing in promising business projects.
Experts classify the causes behind inflation as monetary/non-monetary and domestic/external. The quantity theory of money, extremely popular among liberal economists, insists that the amount of active money in circulation is the factor that determines the purchasing power of a unit of currency and the overall price plateau in the national economy. This means that excess emission is the first and often foremost reason that sets the price flywheel in motion. Since the central banks are responsible for currency emission, scientists and consumers often associate inflation with the banks’ actions.
Inflation almost inevitably follows warfare within the country or interstate conflicts. In the times of armed conflicts governments usually do not bother to develop sustainable models of public finances with budget balance of revenues and expenditures. They find it easier to go full steam ahead with the printing press and overflood the domestic market with depreciated banknotes, which furnish military operations and supplies for the army.
The ‘non-monetary’ causes of inflation may include such factors as monopoly dominance in the domestic market and the overall growth of manufacturing costs due to unstable economic development (reforms).
We should search for the key drivers of inflation within the domestic economy, in forced or erroneous actions of the monetary authorities, and the government’s desire for populism. At the same time, inflation can also penetrate an economy from the outside due to global price surges for goods and services or regional and global economic crises.
Central banks choose methods of counteracting inflation depending on its causes. We have thus far mentioned only a few of them. International practice knows many more. Therefore, bankers and experts do not have a single recipe for fighting inflation. Even more so as bankers see low inflation (around 2 percent a year) as a blessing and believe it should be welcomed rather than feared.
Theory and time recognize two horizons of actions of monetary authorities and legislators, which may prevent inflation from threatening the population or the budget of a country. The measures a government can take to curb mounting inflation in the short run (up to a year) may include raising interest rates, cutting government spending, lowering customs duties, reactivating strategic reserves of raw materials and manufactured goods, etc.
Long term priorities are robust market institutions, highly competitive domestic market, balanced budget, and low public debt. The newest challenges of the global economy require new solutions to curb inflation. Scientists, monetary institutions of individual countries and international financial institutions are constantly looking for them.’
- What is the Central Bank of the RF doing to keep inflation in check?
‘For almost a quarter of a century the Central Bank of the Russian Federation has been pursuing a policy of achieving low inflation. So far, the results have not been quite successful. In present-day Russia an acceptable level of price growth is around four percent a year, which is on average twice as high as in the EU or the USA, who are trying to prevent prices from rising above 2 percent a year.
The inflation shock the Russian economy experienced in February to April 2022, when prices soared from 8 to almost 20 percent a year, forced the Central Bank to take a series of measures, which have proven to be effective so far.
I am referring to soft, yet constant control of price growth for socially important foodstuffs and consumer goods. The country’s budget remained balanced, while minimizing the threat of deficit. They restored confidence in the ruble through a sharp advance in interest rates, which stopped the population from purchasing foreign currency and everything they saw on store shelves in panic. Employment in Russia has been at a record high throughout the post-Soviet history, which inspires faith in citizens for their well-being in the future.
It is still too early to judge whether the measures taken by the Central Bank of the Russian Federation have been successful, since the Western sanctions war against the national economy is in full swing, and the conflict in Ukraine is dragging on for longer than anticipated. Yet amazingly the actions taken by the monetary authorities in Russia led to the fact that the inflation explosion in early 2022 was followed by zero inflation in May, and then deflation (price reduction) that has lasted almost three months. This speaks of certain achievements in price control and inflation reduction.’
- What strategy would be the most advantageous for Azerbaijan in curbing inflation?
‘Every decision the state authorities make to combat inflation comes with a cost and it is up to the Azerbaijani politicians to decide which sectors of the economy and groups of population will pay the price. Theoretically the measures the authorities of Baku may consider might include the following: Combating monopoly in the domestic market and increasing transparency in state actions, especially in public procurement; state control over those commodities that demonstrate particularly rapid price growth rates; opening the domestic market for cheap imports; using foreign exchange reserves to saturate the consumer market with cheap goods.
The current inflation rate in Azerbaijan, which exceeds 12 percent a year, is too high for the vast majority of the population, whose incomes are growing at a much slower pace.
Therefore, perhaps, the government should study the experience of other countries in providing food and material assistance to the groups of population, who are the least well-off and most affected by inflation. This emphasis on micro-level action is all the more relevant, given the economic growth rates in the country are among the highest in the region.
If Baku turns to the Russian experience, raises interest rates or valorises the exchange rate of the manat, price abatements in the domestic market will be followed by a slowdown in economic growth or even an economic crisis. In other words, the government of Azerbaijan will have to walk on the razor’s edge, maintaining high rates of economic growth and social stability at the same time.’
- How does the disruption of logistics affect the cost of transportation?
‘Experts cite soft monetary policy and disruptions of supply chains as the two main reasons for the upcoming global economic crisis. Possibly, this crisis will not hit the entire globe, but it has already affected certain regions, such as Europe, North America, and Middle East. Therefore, analysing the transport and logistics market is the most urgent task that will enable correctly assessing the current state of affairs in the global economy and forecasting the prospects for its development in the next 2 to 3 years.
Logistics disruptions are most unfavourable for the economy. Ordinary people cannot find consumer goods on store shelves, boosting prices for them, therefore leading to inflation. Enterprises do not receive their utilities, which leads to suspension of production, causing surges of unemployment and lowering economic growth. Food commodities take more time to transport or remain in manufacturers’ stocks altogether, resulting in higher prices for groceries. This in turn aggravates food shortages and raises famine threat in certain countries and regions.
Obvious achievements in developing the global transport and logistics facilities in the era of globalization have got us comfortable and used to having uninterrupted transport services with minimal delivery costs, which do not affect the overall retail price of the goods. But the current crisis became a reality check, demonstrating that simply maintaining the current level of development of the transport and logistics industry requires investments worth trillions of dollars and comprehensive international cooperation. The only thing we can do for now is hope that the mankind will be able to shoulder the problem we are facing.’
AzVision.az
