In May 2023, consumer inflation in annual terms continued to slow to 15.3% yoy, down from 17.9% yoy in April. In monthly terms, prices increased by 0.5%. This is according to data published by the State Statistics Service of Ukraine.
The actual rates of price growth were below the trajectory of the NBU’s forecast published in the April 2023 Inflation Report. Inflation slowed because of the sufficient supply of food and fuel, the strengthening of the hryvnia in the cash FX market, and the improvement of exchange-rate and inflation expectations. The slowdown in inflation was also largely due to the base effect.
Core inflation decreased to 15.6% yoy in May, down from 16.9% yoy in April
The rise in the prices of processed foods significantly decelerated, to 17.1% yoy. This slowdown was driven by the further deceleration of the growth in raw material and energy prices and the recovery of logistic and production chains. Prices for bread, flour products, confectionery products, beverages, and canned food grew more slowly. The pullback in global prices amid weak demand, as well as uncertainty around potential disruptions to food deliveries through neighboring EU countries, slowed the growth in prices for dairy products and sunflower oil. The improvement in exchange rate expectations amid a stronger hryvnia in the cash segment contributed to the decline in the pace of price increases for imported products.
Nonfood prices also rose more slowly (by 14.5% yoy). Base effects and improved exchange-rate and inflation expectations contributed to slower growth in prices for personal care products, clothing and footwear, electronic devices, pharmaceuticals, toys, furniture, household appliances, home goods, and cars.
The growth in services prices decelerated (to 14.6% yoy). Price increases for the services of cafes and restaurants continued to decelerate as cost pressures eased and the FX market situation improved. Against the backdrop of base effects, the same factors weighed on the growth in the prices of healthcare, veterinary services, sports services, rentals, multiple-glazed units installation services, and car maintenance. The decrease in fuel prices restrained the growth in the prices of taxi rides and moving truck rentals. By contrast, prices for beauty salon services and hotel stays grew faster, probably driven by the further recovery of demand amid a restrained supply.
The growth in raw food prices slowed to 22.6% yoy
Milk prices grew more slowly due to a surplus of the product against the backdrop of weak demand. Cereal and flour prices continued to decline due to low export prices and sufficient grain stocks to meet domestic needs. A decrease in import prices and the strengthening of the hryvnia cash exchange rate contributed to a further slowdown in the price of bananas. The growth in prices for greenhouse vegetables slowed, mainly due to expanded supply. Egg prices eased slightly for the month due to increased supply, but annual price growth rates remained high because of base effects and increased exports.
Meanwhile, prices for the vegetables used in the cooking of borshch rose at a higher pace: cabbage rose in price faster due to an off-season drop in the supply of its early varieties, and prices for onions and carrots grew more quickly because of the drawdown of stocks in Ukraine and beyond. As with the month before, the higher rate of increase in meat prices was driven by a domestic deficit and low imports amid rising world prices.
The increase in administered prices slowed to 9.3% yoy
The sharp slowdown in the growth of prices for alcoholic beverages is attributable to moderate demand and more upbeat exchange rate expectations amid base effects. Tobacco products rose in price a bit more slowly. Apart from the exchange rate factor, this probably reflected the pressure from the shadow market supply. The growth in prices for transportation services slowed thanks to the decline in fuel prices. The moratorium on raising utility prices for households continued to restrain the increase in administered prices.
Fuel prices decreased by 1.4% yoy (down from a 24.2% yoy surge in April)
This is explained away by the availability of significant inventories, the retreat of global oil prices, tighter competition, and a high base effect.
Inflation continues to ease due to the excess of food supply over demand, significant fuel inventories, and an improvement in exchange-rate and inflation expectations amid a stronger hryvnia. The latter are also contributing to the easing of underlying inflationary pressures.
However, a further pullback in inflation will be much more restrained compared to previous months. This will be due to the fading of base effects, the return of pre-war taxes on fuels effective 1 July, and pricing changes in the electricity market. In addition, the consequences of russia's terrorist attack on the Kakhovka HPP, which have disrupted the operation of multiple enterprises in the region and caused a partial loss of crops, will have a negative, though moderate and temporary, impact on inflation.
These and other aspects will be factored into the NBU's monetary policy decisions and updated macroeconomic forecast, which will be made public on 27 July 2023 at a press briefing on monetary decisions taken by the NBU Board.
To minimize risks to exchange rate sustainability, especially with the gradual easing of FX restrictions, and to ensure a steady decline in inflation, the NBU will continue to keep its key policy rate at the level of 25% per annum.