– The expected inflation when changing their prices account for 22% of Russian companies, 7% – focus on actual inflation (adaptive expectations), the majority (71%) consider both, said in a research note, Department of research and forecasting of the Central Bank of the Russian Federation on the basis of survey of enterprises.
The Bank of Russia in December 2016, conducted a survey of Russian enterprises to explore pricing mechanisms for domestic producers, as well as identifying the role of inflation expectations in price formation, noted in the materials Department of the Central Bank. The results of this survey revealed a number of factors contributing to the inertia of inflationary processes in Russia, that is reactive and takes a longer time of response of inflation dynamics to shocks. The study involved 554 firms in all sectors of the manufacturing industry and agriculture.
Inertial inflation mechanisms
Adaptive expectations, which rely only on price changes in the past, can lead to inertia in the inflation process, said Department of the Central Bank. “As a result of rising prices in the previous period, ceteris paribus, and is likely to generate rising prices in the future,” the document says.
At the same time in different sectors varies, the share of companies that focus only on past inflation. Above average, the share of vehicle production (17%), furniture manufacturing (10%) and chemical production (10%). According to analysts of the Central Bank, the slowdown in the growth of prices for the products of these industries may require more time than the reduction of inflation in the economy as a whole.
The Department emphasizes that large companies to a greater extent than small companies, are based on expected price changes. Among the major companies 21-24% are guided by forecasts of inflation, among small – 15%.
To the inertia of inflation can also lead to price rigidity when prices respond to various types of shocks gradually, because of the availability of limiting factors. Thus, the rigid fixture of the prices is characteristic for 45% of the companies surveyed, 67% have a high degree of price inflexibility: adjust prices once a year 41%, quarterly – 26%.
“The rigidity of prices is inherent in the main sectors producing investment and intermediate goods. Prices for consumer goods (food, shoes) more flexible and adapt to consumer demand. The high volatility of price dynamics for agricultural products is due to seasonality of production. Besides food and agricultural commodities are traded on markets with stronger competition,” explains the Department.
Flexible pricing mechanism of price adjustment as necessary adheres to 41% of enterprises. A mixed strategy is used by 14% of companies.
“As a rule, in the economy with high inflation, companies often revise the selling prices of their products. In low inflation rates are more resilient to shocks cost shocks including exchange rate that is less responsive to such shocks,” – analysts stress.
In addition, another inertial mechanism may be a constant growth of expenses on payment of labor. “In the case of faster growth of nominal wages compared with productivity growth of enterprises are forced to raise prices on their products due to pressure of costs. It supports the growth of prices in industry and the economy as a whole”, – said in a research note.
Wages and productivity
Strong and moderate relationship of wages to productivity note 64% of companies surveyed. Under the conditions of faster growth of salaries compared to the productivity start to increase unit labor costs. “Ceteris paribus this leads to an increase in selling prices for products, as well as putting upward pressure on inflation”, – underline analysts of the Bank of Russia.
The reasons for the increase in wages not accompanied by productivity growth, associated with the shortage of qualified personnel in the industry and the presence of employment contracts involving annual compensation to employees in accordance with the level of inflation or higher according to the internal policy of the company, they pay attention. The majority (63%) of companies said that have strong (27%) or moderate (36%) impact of skills shortages, therefore they are forced to increase wages even in times of crisis.
Key cost factors
The Central Bank survey also showed that key factors in company costs is called the cost of raw materials (95%) and exchange rate changes (42%). The latter has a strong influence in sectors with a high share of imports in costs. The cost of debt service in 2016, played a secondary role in the formation of prices in almost all sectors, except for agriculture and the production of transport equipment.