Shrinking middle class in Russia poses risk for management of inflation

Russian Central Bank found more negative effects of the declining middle class in the country. The regulator warned that its ability to manage inflation is at risk because of growing inequality and the disappearance of middle-income households that are most sensitive to changes in interest rates and prices. The income and domestic demand has declined at an unprecedented pace. Data shows that retail sales declined in September for 21 consecutive months, while real disposable income recorded an annual decline of 7%.

The consumption in Russia is shrinking because wages can not grow at the same rate, which increased cost of living. So over the last two years 14 million Russians are now out of the middle class. The contraction of this social group, which prospered during the oil boom and doubled, now is moving in the opposite direction. Many of these people now rely on state aid and have become more vulnerable to changes in fiscal policy.

The shrinking of the middle class is not good for managing inflation, as risks from fiscal policy are larger. The demand will be more sensitive, as regards solutions budget.

While the growth of inequality is shrinking consumption and disappearing middle class could jeopardize growth, the impact of polarization in income on central bank policy is less obvious. A deep social inequality weakens the price elasticity of demand and complicates the task of inflation control. The poorer families generally have no savings and access to credit, spending on basic products and do not react to changes in interest rates. Richer households on the other hand, did not respond because spending very little of their income on necessities.

Households of the middle class are the most sensitive to changes in interest rates and consumer prices, which encourages manufacturers to make changes to their demand. The economic policy that promotes a more even distribution of income in society will create conditions not only for balanced development and social stability, but also will improve the effectiveness of monetary policy.

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