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NBU March 2022 Inflation Update

NBU March 2022 Inflation Update

In March 2022, consumer inflation accelerated in annual terms, to 13.7%, up from 10.7% in February. In monthly terms, prices grew by 4.5%. This is according to data published by the State Statistics Service of Ukraine.

The rise in inflation was driven by supply chain disruptions, uneven demand, higher business costs, and the physical destruction of company assets due to russia’s full-scale assault on Ukraine. In addition, the acceleration of inflation may have been due to the likely significant rise in prices in the areas partially occupied by russia, as the russian invaders blocked the delivery of goods into those territories. Prices for food, pharmaceuticals, and fuel were the first to surge.

Core inflation rose to 10.5% yoy, up from 8.2% yoy in February

The growth in prices for processed foods accelerated to 16.6% yoy. The rise in prices for almost all goods in this group, including dairy products, meat, pasta, confectionery items, and nonalcoholic beverages, accelerated. This was due to an increase in input prices and the cost of delivery amid supply chain problems. The price surge was also driven by the physical ruining of production facilities and warehouses that came under attack from the enemy. On the other hand, the annual growth in prices for bread remained stable, while that in sunflower oil prices continued to decelerate, in part due to the base effect.

Nonfood price growth also picked up, but it remained relatively slow in year-on-year terms (3.6% yoy) due to the fixed hryvnia exchange rate and a shift in household demand towards staple goods. However, the latter fueled a sharp rise in prices for pharmaceuticals and certain personal care products. The growth in the prices of household goods also sped up, in part due to the limited operation of retailers amid store closures. At the same time, clothing and footwear prices continued to decline.

The increase in prices for services also accelerated somewhat (to 11.3% yoy). Against the backdrop of a massive evacuation from the areas of active combat, the cost of renting hotel rooms and other types of accommodation in Ukraine’s west increased significantly. That being said, the share that those rentals take up in the consumer price index is small. Car maintenance services and taxi rides also rose in price, including due to higher fuel and lubricant prices. With food prices having risen, and with demand in some regions being likely to have increased, prices charged by cafes and restaurants also increased. Meanwhile, services provided by dry cleaners, hairdressers, beauty salons, as well as healthcare professionals, became less expensive.

Price increases for raw food accelerated markedly (to 20.7% yoy)

Because of a limited supply, vegetables used in the cooking of borshch grew in price. Prices for imported and greenhouse vegetables (cucumbers, tomatoes, zucchinis, eggplants) also increased due to supply chain disruptions, higher energy prices, and the russian occupation of parts of Ukraine’s territory, especially in the southern regions, which specialize in growing these vegetables. Prices for fruits, especially bananas and citrus fruits, returned to growth on an annual basis, because of difficulties in importing them due to the blockage of sea routes and because of increased production costs of businesses. Cereals and livestock farming products became more expensive. Those include meat, eggs, and milk.

The growth rate of administered prices went slightly up (to 12.7% yoy)

With fuel prices growing, transport services also became less affordable. Prices for pharmaceutical products monitored by the state, alcoholic beverages, and tobacco products also accelerated. In the meantime, fixed prices for most utilities restrained the growth in administered prices.

Fuel prices continued to rise faster (by 30% yoy)

This was primarily due to the surge in global oil prices, the destruction of fuel infrastructure by the russian invaders, and problems with fuel supplies. However, the reduction in the VAT rate and the cancellation of the excise tax on fuel in the second half of March restrained the increase in prices.

The acceleration of consumer inflation in March indicates that there was a significant increase in inflationary pressure driven by supply chain hurdles, reduced supplies, inflated production costs, and stronger demand for certain goods and services. The measures taken by the NBU, the Verkhovna Rada, and the Government of Ukraine are intended to curb the growth in prices.

At the same time, given the limited impact of market-driven monetary instruments amid forced administrative restrictions, the NBU in March 2022 temporarily postponed all decisions regarding its key policy rate. After Ukraine is liberated from the hordes of invading russians, and after the monetary transmission channels are restored, the NBU will go back to its traditional pursuit of inflation targets, and it will use its key policy rate and other monetary instruments to control inflation expectations and bring inflation back to 5%.

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