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NBU October 2022 Inflation Update

NBU October 2022 Inflation Update

In October 2022, consumer inflation accelerated to 26.6% yoy, up from 24.6% in September. In monthly terms, prices increased by 2.5%. This is according to data compiled by the State Statistics Service of Ukraine.

Direct consequences of russia’s full-scale war against Ukraine remain the main driver of the increase in inflation. Those include the disruption of production and supply chains, the growth in businesses’ production costs, ad-hoc increases in the demand for certain goods and services, and a decrease in the supply of goods. The indirect fallout from the war – exchange rate effects and worsening expectations of households and businesses – also affected prices.

The actual rates of price growth followed the trajectory of the NBU’s baseline forecast published in the October 2022 Inflation Report.

As expected, core inflation accelerated to 21.5% yoy, up from 20.4% yoy in September

The growth in prices for processed foods accelerated to 27.2% yoy. Meat products, confectioneries, nonalcoholic beverages, and sauces rose in price due to businesses’ heightened production costs fueled by price increases for raw materials, energy, and logistics. Price growth picked up for dried fruits, fish products, olive oil, and sunflower oil and its derivatives (mayonnaise, margarine, spreads) as changes in the hryvnia exchange rate continued to pass through to prices. With Ukraine’s exports of dairy products expanding significantly, prices for butter and cheese in the domestic market increased.

Nonfood products also grew in price at a quicker pace (19.9% yoy), driven by the drawdown of the stocks of imported products (purchased when the exchange rate was lower), the pass-through effect of the hryvnia exchange rate adjustment, and the worsening of expectations. Specifically, the increase in prices accelerated for clothing and footwear, household goods (cookware, furniture, textiles, appliances, and chemicals), electronic devices, cars, personal care products, and home repair goods. With the surge in demand, aggravated by the shelling of energy facilities, prices increased for heaters, stoves, and other goods related to backup power and heating.

The growth in services prices held steady (15.7% yoy). On the one hand, prices for telecommunication services, car insurance, nail care, movie tickets, residential buildings maintenance, and multiple-glazed units installation increased more slowly. On the other hand, prices for healthcare, repairs, and the services provided by dry cleaners, hotels, and restaurants grew faster as demand strengthened. 

The growth in raw food prices picked up sharply (to 47.1% yoy)

This acceleration was primarily driven by the significant increase in egg prices. This is attributable to the destruction of poultry farms, increased costs and supply chain disruptions in egg production at the outbreak of the war, current problems with energy supplies, and the drop in the livestock of home-grown chickens, in part due to migration.

Prices for fruits, primarily imported ones, grew at a higher clip due to exchange rate effects, complicated logistics, and an increase in global fruit prices. Pork also became more expensive, because of the limited supply of live pigs and power outages. As a result of higher energy prices and the slower pace of sugar beet harvesting compared to last year, the growth in sugar prices picked up.

In contrast, price increases for flour, buckwheat, and other grains decelerated on account of harvests coming out better than expected. The growth in prices for vegetables, primarily those used in the cooking of borshch, also slowed as supply from the central and northern regions expanded.

The rate of growth of administered prices remained at the previous month’s level (14.6% yoy)

The moratorium on price increases for natural gas and heating for households continued to restrain the growth in administered prices. The increase in tobacco product prices also held steady compared to the previous month, because of heightened competition from illegal products. In addition, transport services grew in price at a slower pace as fuel prices stabilized.

At the same time, alcoholic beverages continued to rise in price amid elevated production costs (prices for energy, raw materials, and containers). Firewood prices also went up due to intensified demand for alternative fuels as the enemy destroyed energy infrastructure.

Fuel price growth decelerated (to 61.9% yoy)

This can be attributed to the slowdown in oil price increases in annual terms, as well as to more supplies from European countries.

As expected, inflationary pressure is rising as the war grinds on. However, inflation remains in check, and current inflation developments are following the trajectory of the NBU’s forecast. It predicts that inflation will rise to about 30% at the end of this year and ease in 2023.

To keep inflationary processes under control, the NBU maintains the key policy rate at the level of 25% and expects it to stay at the current level for a long time. This is necessary to ensure the investment appeal of hryvnia assets, take pressure off the FX market, balance expectations, and ultimately reduce inflation in the years ahead.

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