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NBU July 2021 Inflation Update

NBU July 2021 Inflation Update

In July 2021, consumer inflation accelerated to 10.2% yoy, up from 9.5% yoy in June. In monthly terms, prices grew by 0.1%. This is according to data published by the State Statistics Service of Ukraine.

Consumer inflation was in line with the projected trajectory published in the NBU’s July 2021 Inflation Report, but the dynamics of some of the components differed slightly. In particular, domestic prices for sunflower oil started to adjust earlier than expected, while the prices of certain foods grew faster. 

Core inflation in July remained at the previous month’s level (7.3% yoy) 

Solid consumer demand, coupled with increase in production costs (in particular raw materials, energy, and wages), further accelerated the growth in prices for processed foods (to 12.3% yoy). More specifically, prices for pasta and meat, confectionery, and dairy products continued to grow. The price increase was somewhat curbed by the weaker growth of sunflower oil price in annual terms. However, this has not yet affected the prices of sunflower-oil-based products (margarine and mayonnaise), which kept growing at a faster pace. 

The growth in the prices of services accelerated (to 8.2% yoy). Robust consumer demand and growing production costs were also the driving forces here. Prices for services of cafes and restaurants, museums and theater tickets, hospital services, personal vehicle insurance, taxi rides, housing rentals, and housing repairs grew more quickly. Meanwhile, the growth in the prices of tourism services slowed as more holiday destinations abroad became available. 

The growth in nonfood prices slowed to 1.2% yoy, thanks to a sharp decrease in COVID-19 cases and favorable FX market conditions.  In particular, prices for pharmaceutical products, medical goods, detergents, and cars grew at a slower pace, while clothing, footwear, and home textiles became even cheaper. The prices of electronics, personal care products, furniture and utensils grew faster, propelled by steady consumer demand.

Growth in raw food prices accelerated (to 8.2% yoy)

The faster growth in egg prices was primarily driven by higher fodder prices. In addition, hot weather could have contributed to the increase in egg prices. Prices for milk and meat also increased because of the higher cost of fodder and energy, as well as a shrinking supply amid a decline in animal farming. Sugar prices continued to increase due to high global prices and last year's poor sugar beet harvests. Prices for borsch vegetables also returned to growth in annual terms due to this year’s worse weather conditions. On the other hand, some other vegetables (tomatoes, cucumbers, and zucchini) and fruit (grapes and apples) continued to decline in price as their supply expanded. 

The increase in administered prices accelerated further (to 18.5% yoy)

On the one hand, the prices of alcoholic beverages rose more quickly, driven mainly by higher prices for beer and sparkling wines. Prices for transport services kept increasing, primarily due to higher fuel costs and wages. As the number of flights continued to grow and demand remained high, airlines raised their prices to offset their losses incurred during downtime. Local landline telephone rates also grew at a faster pace. 

On the other hand, the increase in the price of natural gas slowed somewhat, primarily due to the comparison base effect. Specifically, although natural gas prices in Europe grew rapidly, in Ukraine the natural gas price for households increased only by 3.3% mom in July due to the annual contract option.

The growth in fuel prices continued to gradually decelerate (to 33.8% yoy)

This is primarily attributed to the effect of a comparison base. In addition, price regulation, in the form of a cap on the trade margins for A-95 petrol and diesel fuel, had a certain effect.

In Q3, inflation will stay above 10% yoy, but will slow by the end of year. Inflation will reach 9.6% yoy by the end of 2021 and return to its 5% target in H2 2022. 

Inflation will slow with the arrival of the new harvest, the adjustment of global energy and food prices, and due to the tighter monetary policy conducted by the NBU, in particular through raising its key policy rate and phasing out emergency monetary measures.

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