Low inflation is also harmful to country: Proven by Ukraine

Author : Bohdan Danylyshyn

Source : 112 Ukraine

The State Statistics Service revealed data on inflation in Ukraine in 2019
13:24, 15 January 2020

The State Statistics Service revealed data on inflation in Ukraine in 2019. Consumer prices rose by 4.1% over the year. The National Bank formally achieved the inflation target set forth in the “Fundamentals of Monetary Policy for 2019 and the Medium Term” - 5% ± 1 percentage point.

The food product price increased last year by 4.8%, that is, the rise in food prices was higher than consumer inflation. The most expensive were fruits - 18.8%, bread - 9.7%, butter - 7.8%, cheese - 7.7%, milk - 7.4%.

Alcohol and tobacco products rose by 13% in 2019. Talking about utilities, hot water and heating went up by 14.4%, water supply services - by 12.7%, water disposal - by 12.2%. But due to a decrease in gas tariffs by 28.7%, housing, and communal services, in general, fell by 1.9%.

Consumer inflation in 2019 was at its lowest level since 2013. How did we manage to achieve low inflation? Because of the favorable situation on the world markets of the main imported goods - oil and gas.

The revaluation of the hryvnia also contributed (however, it also contributed to the drop in industrial production and the growth of foreign trade - it was exclusively negative).

But the main thing that ensured low consumer inflation was the unjustifiably tight monetary policy of the NBU: the discount rate decrease began too late, the rate reduction was purely symbolic (up to the December decrease of 2 points).

At the moment, the NBU discount rate is 3.3 times higher than consumer inflation!
There is disadvantages to last year’s low inflation. Which, in my opinion, far outweighs the positive from low inflation.

Related: Government predicts inflation rate in Ukraine to drop to 5%

1. For six consecutive months (from May to November) industrial production has fallen (no data are available for December), and in November last year, industrial production fell by 7.5% until November 2018 and by 4.6% until October 2019.

2. Producer prices for 11 months of last year decreased by 4%, including in the mining industry - by 19.8%, in the processing industry - by 4.9%. Industrial deflation may trigger a further decline in industrial production.

3. The foreign trade deficit for 10 months of 2019 amounted to $ 9.95 billion.

Unemployment in November grew by 11.4% compared with October. High rates on bank loans, due to the inadequately high NBU discount rate, significantly complicate lending to the real sector of the economy and exporting enterprises in particular.

Producers are forced to cut production and fire workers. Another negative effect is the diversion of tens of billions of hryvnias to NBU certificates of deposit, the high yield on which is explained by the level of the discount rate.

An unreasonably high discount rate was also decisive for an uncontrolled inflow of speculative foreign capital in government bonds (over the past year, non-resident speculators' investments in government bonds increased 18.5 times), which poses serious potential threats to the stability of the financial system in the event of a sharp outflow of speculative capital in the coming 1-2 years.

For Ukrainian banks, investments in government bonds have displaced lending due to high returns. The formal fulfillment of the inflation target in 2019 (without assessing the impact on the national economy as a whole) created serious problems for the economy and laid dangerous mines under its functioning in the next few years.

Related: Ukraine to receive $698 million in aid from U.S., - Ambassador to U.S.

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