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NBU July 2020 Inflation Update

NBU July 2020 Inflation Update

In July 2020, consumer inflation was flat from the previous month in annual terms, at 2.4%. In monthly terms, prices fell by 0.6%. This is according to data compiled by the State Statistics Service of Ukraine.

Consumer inflation remained below its target range of 5% ± 1 pp, as expected. It was also slightly lower than predicted by the projected trajectory published in the July 2020 Inflation Report. In July, inflation was primarily weighed down by slower growth in food prices amid an increase in the supply of both domestically produced and imported foods.  Coupled with weak domestic demand, the higher supply offset inflationary pressures from a weaker hryvnia and more spending by companies, including on disinfection measures, as businesses in the services sector reopened.

Core inflation came in at 3.0% yoy, unchanged from June.

The pace of growth in the prices of processed foods slowed (to 3.5% yoy). Prices for meat and nonessential products, including confectionery, ice cream, spices, and tea, grew at a slower pace, restrained by sluggish demand for these relatively expensive foods. Higher supply, including the supply of imports, dragged down the growth in prices for dairy products. Prices for bakery goods also grew more slowly, while olive and sunflower oil remained cheaper than last year.

Services prices grew at the same rate as in June (8.4% yoy). Prices for healthcare services increased more quickly, probably due to higher morbidity. The increase in prices for financial and insurance services, as well as mobile communications, accelerated. Against the backdrop of reviving economic activity and increasing spending, including on disinfection, the services sector made an almost full recovery, speeding up the growth in prices for services related to personal care, catering, dry cleaning, and sports facilities. Meantime, weak demand and the renewal of quarantine restrictions in some areas held back the growth in prices for cinema tickets, hotels, and tourist services.

The fall in nonfood prices decelerated (to 1.1% yoy), held back by both the weakening of the hryvnia in July and the realization of pent-up demand from consumers. As a result, the decline in prices for durable goods, including household appliances and electronic devices, decelerated, and car prices returned to growth while medicines continued to rise in price. However, the exchange rate factor did not have a significant impact on prices for medium-term consumer goods, as stores were well-stocked in previous periods. Prices for clothing and footwear and utensils declined even deeper, while prices for home textiles, personal care products, and books grew at a slower pace.

  • The growth in raw food prices decelerated significantly (to 3.3% yoy), thanks to the new harvest, an increase in the supply of goods produced domestically in small towns after public transportation reopened, as well as a rise in imports in recent months. More specifically, vegetables became even cheaper in July, including potatoes, onions, cabbage, and tomatoes, while prices for sugar and pork fell. Prices for cucumbers, zucchini, garlic, eggs, and milk increased more slowly.
  • The growth in administered prices accelerated somewhat, to 3.8% yoy. In particular, natural gas prices declined more slowly (by 43.0% yoy) as global energy prices and natural gas distribution tariffs increased. The growth in railway fares accelerated due to higher production costs. Meanwhile, prices for alcoholic beverages and tobacco products rose more modestly.
  • The drop in fuel prices continued to decelerate (to 21.5% yoy), primarily reflecting the recovery in global oil prices in recent months, as well as strong demand for fuel from car owners even as restrictions on public transit were relaxed.

Going forward, the gradual recovery of consumer demand and economic activity amid the NBU’s monetary policy easing and the government’s fiscal incentives will help return consumer inflation into the target range of 5% ± 1 pp.

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