n May 2017, headline inflation accelerated to 13.5% yoy, up from 12.2% yoy in April. In monthly terms, the CPI increased by 1.3%, according to data released by the State Statistics Service of Ukraine (SSSU).
Actual inflation came in above the NBU’s projections in both annual and monthly terms, primarily reflecting faster growth in raw food prices and a stronger impact of administered factors. Meanwhile, underlying inflation pressures were weaker than expected.
Core inflation expectedly picked up in May (to 6.5% yoy, stood at 0.3% mom), but fell short of the NBU’s projection owing to the improvement in inflation expectations amid a further strengthening of the hryvnia against the US dollar. The acceleration of core inflation was due to secondary effects from rising raw food prices and a continuing pass-through from increased production costs. Correspondingly, this pushed up prices for processed foods and selected services included in the core CPI. In particular, prices for meat products, cheese, recreational and cultural services, as well as prices for restaurants and hotels picked up in May.
Raw food prices accelerated further to 13.8% yoy (were up by 4.7% mom). Overall, the rise in prices of these goods was expected, however, the pace of increase outperformed the NBU’s projections. In particular, prices for meat and raw milk continued to accelerate in annual terms, driven by higher global prices and robust exports. In addition, raw food prices were adversely affected by bad weather conditions. A reduction in the supply of domestically produced fruit and vegetables (due to late frosts in April-May) and higher supply of more expensive imported products contributed to the recovery in vegetable price growth (were up by 9.8% yoy) and pushed fruit prices higher (to 12.7% yoy). In May, prices for eggs declined in annual terms (by 10.4%) as partial export restrictions on poultry-related products were maintained.
The growth of administered prices and tariffs accelerated to 28.1% yoy (stood at 1.4% mom), primarily reflecting higher tariffs for cold water and sewerage effective from 12 May 2017. In addition, prices for tobacco products accelerated significantly (to 40.8% yoy) due to distribution difficulties.
Fuel prices decelerated to 15.7% yoy (were up by 0.9% mom) due to a high base effect, which was in line with NBU staff estimates.
In May 2017, the producer price index growth slowed to 27.1% yoy (1.3% mom), mainly reflecting price deceleration in domestic iron ore production and metallurgy.
Despite lower-than-expected core inflation, current developments of the CPI and its components point to heightened risks that headline inflation may come in above the NBU’s year-end inflation projection of 9.1%, which was published in the Inflation Report (April 2017), due to supply-side shocks.