According to data released by the State Statistics Service of Ukraine, consumer price inflation slowed from 13.7% in 2017 to 9.8% in 2018. This shows that the upward inflation trend of 2017 has been reversed, and that underlying inflationary pressures on the Ukrainian economy have weakened. This was mainly the result of the NBU’s tight monetary policy.
Despite the expected drop, inflation, as predicted, exceeded the 2018 year-end target of 6% ± 2 pp set by the National Bank of Ukraine in its Monetary Policy Guidelines for 2018 and the Medium Term.
The central bank’s tight monetary policy was instrumental in reversing the upward trend and reducing the yearly inflation rate to single-digit figures for the first time in the last five years. The NBU started to gradually raise the key policy rate in October 2017 to respond to rising inflation risks. Last year, with a view to bringing inflation back to its target over the medium term, the NBU Board raised the key policy rate four times, by a total of 3.5 pp, to the current interest rate level of 18.0% per annum. This pushed up interest rates and, consequently, acted as a stimulus to an increase in savings. It also caused the exchange rate of the hryvnia to strengthen against the currencies of Ukraine’s main partners.
Inflation also decelerated due to the favorable global prices for Ukrainian exports seen in H1, and the record grain harvest in H2, which helped maintain the high foreign currency supply in the interbank FX market, strengthening the hryvnia exchange rate.
Additional factors included growth in the domestic supply of some foods, driven by the bumper harvest of fruit and oilseeds, increased poultry meat production, and lower global food prices.
That said, year-end inflation came above the target in 2018, largely due to factors over which monetary policy has only a limited effect. These were mainly administered price increases, higher production costs on the back of wage hikes, rising global oil prices seen throughout most of the year, and the narrowing supply of the vegetables that are used for cooking borshch on the back of unfavorable weather conditions.
Consumer demand fueled by higher wages was also an important inflation driver. January – November 2018 saw a 12.8% rise in real wages compared to the same period last year. Uncertainty as to whether cooperation with the IMF will be resumed and high external risks also weighed on economic sentiment throughout most of the year.
- Core inflation decelerated to 8.7% yoy in 2018, from 9.5% yoy in 2017. First, there was some slowdown in the growth in the prices of highly processed foods, such as dairy and milk products, and sunflower seed oil.
Second, the growth in the prices of non-foods that are mainly imported, slowed thanks to benign FX market conditions. In particular, prices for household appliances, cars, and furniture grew at a slower pace than last year, while prices for TV sets, mobile phones and computer equipment were actually cheaper compared to last year. The growth in the prices of clothes and footwear also remained low.
Meanwhile, the growth in prices for services included in core inflation accelerated, driven by higher production costs and stronger consumer demand. Among others, mobile telephone services, out-patient services, repair services, housing maintenance services, car insurance services and housing rental services recorded strong price increases.
In addition, prices for bread, confectionery and pasta grew at a fairly fast pace, driven by higher flour prices and an increase in other production costs.
- The growth in raw food prices slowed to 3.3% yoy in 2018, from 23.5% last year.
Indeed, 2018 witnessed significantly lower prices of fruit, due to the bumper apple harvest and lower prices for imported bananas and citrus fruits, as well as lower egg prices.
At the same time, borshch vegetable prices grew at a fast pace. This was attributed to the scarce supply of these vegetables due to unfavorable weather conditions, the poor harvest of these vegetables in Europe, as well as the poor harvest of some domestic vegetables. More specifically, onion prices tripled, while beetroot and carrot prices surged by 74.6% and 79.1% yoy respectively. Furthermore, flour prices also rose noticeably, fueled by higher global prices and the limited supply of high-quality grains.
The growth in administered prices sped up to 18.0%, compared to 16.1% in 2017. Last year saw sizeable increases in gas prices for households, postal, telephone and transportation services, water supply and sewerage collection services, as well as tobacco prices.
- The growth in fuel prices decelerated to 9.1% in 2018 from 20.0% in 2017, thanks to a reversal in the uptrend in global oil prices – following the sharp rises seen throughout most of the year, prices slumped in the last months of the year – dragged down also by a stronger hryvnia.
The NBU’s policy will continue to focus on reducing the growth of prices and achieving the mid-term inflation target of 5% ± 1 pp. The NBU will make public its new macroeconomic forecast on 31 January 2019 during a press briefing on the Board's decision. More details of the forecast will be given in the Inflation Report that will be published on 7 February 2019.