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Inflation in Ukraine: Forecast for foreseeable future

Author : Bohdan Danylyshyn

At the end of July, again, just like in June, deflation was recorded - consumer prices fell by 0.6%
23:28, 15 August 2019

Open source

Autumn is near, so media more and more often ask the question: what would be with the inflation in the fall.

At the end of July, again, just like in June, deflation was recorded - consumer prices fell by 0.6%. Since the beginning of the year, prices in the consumer market have grown by 3%.

Related: Ukraine's inflation rate to exceed expected 7% in 2019

On an annualized basis, consumer prices rose by 9.1% (a month ago this indicator was 9%), this slightly exceeds the trajectory of the inflation forecast for July by National Bank (NBU).

The NBU Board explains this by the rise in the price of a number of raw products due to adverse weather conditions - eggplant, zucchini, tomatoes, cucumbers. High demand contributed to the rise in prices for meat and milk.

Related: Venezuela, Zimbabwe, Sudan, Argentina: World countries with highest inflation rate

But most significantly in July, eggs, and sugar rose in price. Core inflation was in line with the NBU forecast.

However, on a monthly basis, prices for food products and soft drinks decrease by 0.7%.

Slowing consumer inflation and the transition to lower prices in the middle of the year is becoming a trend - this was observed from May to September last year, in May-July 2019 we see it again.

Considering the fact that in late summer and early fall in Ukraine, the supply of fruits and vegetables noticeably increases, and also due to the hryvnia revaluation effect, it is logical to assume that the next 1-2 months will be characterized by low inflation (if any unforeseen circumstances happen).

Usually, the upturn in Ukraine’s inflation occurs in October, which is associated with a gradual decrease in the supply of raw vegetables and fruits.

Related: How to strengthen trust of Ukrainians in hryvnia?

In addition, given the significant share of imports in GDP, will depend on the dynamics of the hryvnia exchange rate. If the September payments on external debt (tentatively estimated at $ 1.7 billion) can be passed without complications, and there are sufficient prerequisites for this, the influence of the exchange rate factor on consumer inflation will not be significant.

It is difficult to make forecasts regarding world energy prices (Vagit Alekperov, the head of Lukoil, said: “Oil prices are set by God”). At the moment, there are no serious prerequisites for their growth, therefore, I assume that the influence on consumer prices through this channel will be restrained.

A serious concern is caused by rising prices in the industry - in July they rose by 3.6%. Basically, an increase was recorded in the group of supply of electricity, gas, steam, and air conditioning (by 16.4% in July).

Given the decline in gas prices for the industry in July, the increase in prices for this group occurred due to an increase in the industry’s price of electricity and air conditioning.

Related: Hryvnia appreciation: Why Ministry of Finance blames National Bank?

At least this is indicated by statements by representatives of industrial enterprises and a number of business associations. Prices for the metal ore mining group increased by 7.3%. Typically, rising prices in the industry come into accelerated consumer inflation with a lag of 2-4 months.

This raises concerns and does not give confidence that inflation goals set in the Basic Principles of Monetary Policy for 2019 (5% ± 1 pp), as well as the inflation forecast of the National Bank (6.3% on end of 2019),  would be realized.

Related: Deflation in July amounted to 0.6%, - Ukraine's State Statistics Service

However, the reason for a possible overflow of industrial inflation into consumers’ one is largely outside the sphere of influence of the National Bank.

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