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Today, due to quite understandable reasons, growth of prices for basic food products, such as milk, butter, bread represents a concern both for the government and the population. According to the official statistic data, to a large extent these are the very goods that caused increased prices in the economy as a whole. Especially ordinary consumers suffer most in their pockets because of this unwelcome situation, and that leads to an on-going popularity of the inflation topic lately. Though for the sake of truth we have to note that unfortunately, our economy does not have any special positive experience of development in low inflation environment. But, perhaps for the first time since 1990-s – when it was the hyperinflation period – the issue of prices is discusses especially aggressively.

Meanwhile, it is quite obvious that at least five drivers fostered acceleration of inflation processes: (i) growth of energy prices; (ii) world tendency of increase of prices for food and scarcity of own agricultural products, also because of the drought; (iii) undeveloped industrial structure; (iv) quick growth of monetary income of the population and increase of solvent demand; and (v) population being not used to make savings.

Let us try to understand the reasons for the current inflation, and, more importantly, capabilities of the state – Government and the National Bank – to influence evolution of inflation processes in the country. In other words, how authorities can and should influence growth of prices in the economy.

Development and implementation of the common state policy in the field of prices is in the competence of the Government. However, while adhering to the liberal pricing model, the participation of the state in the pricing process is minimal and is limited to socially significant sectors, which is in full compliance with the Civil Code and Law on Entrepreneurship and Enterprises. The state policy in the field of prices merely does not exist; though from time to time intentions appear to elaborate a law on prices; however due to vagueness of the problem not a single one of these intentions has been realized. Here the prices are formed mostly freely, depending on the purchasing power of the population and fluctuations of demand and supply in the internal market.

Interference of the state in pricing also today is governed by the Government Decree "On Further Liberalization of Prices" (1994) and by the Government Decree "On Measures on Streamlining and State Regulation of Prices (Tariffs)" (1995). As it seems, the very titles of these documents show reluctance of the state to deal with such a sensitive issue as a uniform price policy.

What limits the state today? First, it is the level of profitability of bread baking production (under 10%) and dairy production (under 15%). Second, the trade mark-up on socially significant goods (up to 20% of free acquisition prices), which include canned infant food, sunflower oil, dairy products, flour, bread (up to 10%) and bakery products, medical supplies according to the list approved by the Ministry of Health Care and other (total of 13 groups of goods). For all other producers (sellers) there are no restrictions either in terms of profitability or trade mark-up.

Preference is given to extraordinary measures, which as a rule are implemented by special task forces. And in July, for monitoring of the situation in the country in the conditions of drought and for the purpose of control over prices for food products, the Government established three such task forces. Two of them are directly related to prices and are supervised by the Ministry of Economy and Trade: one is responsible for monitoring of prices for wheat and flour and control over sale (?) of pastry, and the second one – for "setting" (!) prices for grain and basic food products for the purpose of ensuring food security of the country.

Results of taken actions. During the current (uncompleted) year prices for food increased by 12.1%, including for bread – by 15.2%, milk and dairy products – by 17% and for meat food – by 14.2%. Medicines became more expensive by 16.1%.

It is obvious that attempts of the government to agree with producers on freezing or even reduction of prices fail to find positive response from businesses. One cannot but take also into consideration mentality of our business: freedom means freedom to increase prices, which, definitely, is much easier than to develop production or streamline it.

Moreover, even in world markets, according to the forecasts of the Food and Agriculture Organization of the United Nations (FAO), due to grain crop setback, which was the worst for the last quarter of the century, drastic growth of cost of almost all food products: bread, meat, milk and macaroni products is expected, the prices for which might increase by 80 - 200%. And openness of the domestic economy – import covers not only 50% of the total domestic demand, but also more than 30% of the needs in food – predetermines its extreme sensitivity to external shocks.

In the conditions of a poorly developed competition, released prices behave unpredictably and evade regulation. Moreover, presence of certain interests, both on the central and local levels, quite often hinder even much shier attempts by the government to keep prices under control.

And still the government tries to channel trade to a more civilized course. After approval of industry and agricultural-food sector development strategies, the strategy for support of internal trade development was approved.

In the retail sector the focus is on network trade. Large trading centers are established, in the near future also on the regional level. In parallel, fight against unorganized trade, which today represents more than 40% of retail trade, boosts. But as it seems, this very segment of the market, which is not controlled officially, in a certain sense "competes" with large supermarkets, providing affordable food products to majority of the population. We have at least as many stores as in Europe, but there they operate in competitive environment, and here they do not.

They do their best not to notice problems of wholesale trade – there is no even any comprehensive approach to establishment and functioning of specialized wholesale markets; consequently, market schemes for promoting products to consumers are formed unjustifiably slowly. As a result, there is an excessive number of intermediaries, and quite often non-market mechanisms of market pricing.

Of course, it is much simpler with network trade: here everything is captured and negotiated. Capabilities of the Competition Protection Agency are quite limited. And besides, we still have a lot of advocates of "serious" business, which fact in no way facilitates the life of the Agency, taking into account that it lacks practical operating experience.

All one can do is just "believe" vague statements of the Government that there are no premises for growth of prices for main food products.

Under the current conditions logically calibrated position of the National Bank cannot but inspire respect. Traditionally, the National Bank of Moldova clearly and toughly strives to implement the main task – to ensure and maintain stable prices. And probably that is why as of today it is practically the only state institute that consistently tries to "combat" inflation using for that purpose all available tools and mechanisms for exercising influence in the monetary sphere (both interest rates and foreign currency reserves of commercial banks were increased) and accumulated experience of fighting for stability of lei. However defects of the internal demand/supply consistently prevent implementation of unprecedented attempts of the National Bank to weaken inflation pressure; and efforts of one, though quite mighty player, are insufficient. (Interestingly, how would the situation evolve, would the main objective of the National Bank of Moldova remain unchanged?)

And though the "plan" to ensure 10% level of inflation by the end of the year would be impossible to realize, benchmarks for the future remain in force: growth rate of prices by 2010 should be reduced down to 5%. The question is only how to execute this transition.

The National Bank answers: monetary policy would be changed and we will convert to inflation targeting. In other words the National Bank of Moldova will try to regulate the value of money in the economy with the help of the bank discount rate, and through the mechanism of monetary transmission to influence the level of inflation and economy growth rates. It is planned to reduce the level of inflation within 6–8 months down to a one digit figure.

The National Bank wants to believe it, but increasing risks of price growth in the mid-term perspective might make their own adjustments. External pressure on money offer will only grow: increased inflow of foreign investment is expected. Growth of world prices for food and energy would also contribute to that as well as high inflation expectations and increased budgetary revenues/expenses. Immaturity of financial markets is yet another obstacle for successful implementation of inflation targeting.

Changes in the monetary policy would apparently lead to sustainable strengthening of Lei. And export oriented enterprises still view this fact only as an attempt to undermine salaries through exchange differences, and not as an incentive to improve labor productivity. From the beginning of the year, prices of manufacturers of consumer goods increased by 27.2%. Only time will show whether strengthening of the national currency, at least on a mid-term basis, is able to promote increased labor productivity.

And finally, the draft law on currency exchange regulation adopted by the Parliament in the first reading grants to the National Bank the right to introduce safeguard measures if inflow of capital into the country or outflow of capital out of it represents a threat for the monetary and/or currency policies. Main sources of inflow of capital into the country are well known: credits, investments and transfers by labor migrants. It is quite easy to guess which of them, in case the aforementioned threat appears would become an object of possible safeguard measures. We would prefer even not to think about the consequences of such measures.

And still it is highly questionable that the Bank, even the National Bank, could on its own protect the economy against inflation, which is getting more and more global nature. It is also necessary to have assistance from the Government, which has to create conditions when:

• the growth is ensured by expansion of own production of goods and services, and number of employed grows rather than number of jobs;
• investment activities become more attractive than agency activities; and
• growth of salaries, pensions and receipts from abroad do not jeopardize monetary and/or currency policies.

Meanwhile, the Government of Moldova once again looses fight with inflation.