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NBU February 2022 Inflation Update

NBU February 2022 Inflation Update

In February 2022, consumer inflation accelerated in annual terms, to 10.7%, up from 10% in January. In monthly terms, prices grew by 1.6%. This is according to data published by the State Statistics Service of Ukraine.

Actual consumer inflation markedly overshot the projected trajectory published in the January 2022 Inflation Report. Inflation pressures increased on the back of a flare-up in tensions over a military invasion and then the actual Russian invasion of Ukraine in late February. Food and fuel prices rose most rapidly amid excessive demand and disruptions in supply chains.

Core inflation sped up, to 8.2% yoy, up from 7.6% yoy in January

The growth in processed food prices accelerated, to 13.8% yoy. More specifically, prices for dairy and meat products grew at a faster pace, propelled by higher raw material and delivery prices. Prices for imported foods, such as coffee, chocolate, fish products and dried fruit grew mainly due to a weaker hryvnia and difficulties in supplying these foods to Ukraine. In contrast, prices for bread and pasta remained unchanged in annual terms, while the growth in sunflower oil prices continued to decelerate on the back of base effects.

Nonfood prices also increased, to 1% yoy. Prices for household goods grew more rapidly, while the decrease in car prices decelerated because of a weaker hryvnia. Coupled with stronger demand for personal care goods and pharmaceuticals, this factor sharply pushed up the prices of these products. Conversely, clothing and footwear prices declined more rapidly, which could be attributed to a change in consumer priorities.

The prices of services rose at the same clip as in January (10.5% yoy). On the one hand, prices for catering and hotel services, secondary education, hairdressing salons, air travel, Internet services and so on increased at a somewhat faster pace due to higher production costs, in particular higher labor costs and food and energy prices. On the other hand, prices for financial and medical services grew more slowly.

The growth in raw food prices, at 13.6% yoy, was unchanged on January.

Prices for rice and other cereals increased month-on-month, fueled by more robust demand for foods with a long shelf life. At the same time, the year-on-year growth in these prices was restrained by base effects. Meat and milk prices also increased at a faster pace. The growth in vegetable prices sped up, driven by a weaker hryvnia and higher energy prices. In contrast, egg prices continued to grow at a slower pace, while fruit prices actually declined.

The growth in administered prices accelerated, to 12.2% yoy.

Prices for transportation services grew, propped up by higher fuel prices and a significant rise in demand for these services. What is more, administered prices for medicine also increased. At the same time, the rise in administered prices continued to be curbed by the fixed tariffs for most utilities.

Fuel prices rose at a faster clip, to 27.5% yoy,

 largely due to a spike in global oil prices and a weaker hryvnia. That said, thanks to the caps the government set on fuel prices in May 2021, the growth in fuel prices remained relatively moderate, in spite of the fuel shortages seen in many regions.

Although the increase in consumer inflation in February covered only a few days of war, it showed that inflationary pressures were rising. Apart from disrupted logistical chains and higher production costs, stronger demand from the population and a further increase in global energy prices also played a role. Unchanged tariffs for most utilities, coupled with the NBU’s and the government’s actions, somewhat reined in the growth in inflationary pressures.

However, now that forced administrative restrictions are in place, market-based monetary instruments such as the key policy rate no longer play a significant role in the functioning of the money and FX markets. That said, the NBU remains committed to pursuing its inflation-targeting regime.

Once Ukraine liberates itself from the Russian invaders and the monetary transmission channels start functioning again, the NBU will use the key policy rate and other monetary instruments to keep inflation expectations in check and return inflation to its 5% target.

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