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NBU August 2022 Inflation Update

NBU August 2022 Inflation Update

In August 2022, consumer inflation accelerated to 23.8% yoy, up from 22.2% in July. In monthly terms, prices grew by 1.1%. This is according to data published by the State Statistics Service of Ukraine.

The acceleration of inflation continued to be driven by the fallout from russia’s full-scale war against Ukraine. The russian invasion has led to supply chain disruptions, the destruction of production facilities, the reduced supply of goods and services, and higher costs of businesses. Another factor was the pass-through effect that the adjustment of the official hryvnia-to-dollar exchange rate had on prices. The NBU adjusted the exchange rate in July to preserve the stability of the Ukrainian economy. Price growth was restrained by the fixation of natural gas and heating prices and the domestic market’s saturation with fuel.

Consumer inflation increased as expected, but, for the second straight month, was slightly below the trajectory of the baseline forecast published in the July 2022 Inflation Report, primarily due to a faster decline in fuel prices. However, this deviation narrowed compared to July. In addition, core inflation grew faster than the NBU expected.

Core inflation accelerated to 19.1% yoy from 16.7% yoy in July

The growth in prices for nonfood products sped to 16.7% yoy. This acceleration was driven by the July adjustment of the hryvnia’s official exchange rate against the U.S. dollar, as well as limited deliveries of new batches of goods, increases in business costs fueled by supply chain disruptions, the drawdown of inventories, and the worsening of depreciation expectations. Specifically, prices for household goods (kitchenware, furniture, appliances, and chemicals), electronic devices, cars, medications, personal care products, and home improvement products grew faster. The decline in prices for clothing and footwear slowed.

Processed food prices also rose more quickly (up 23.9% yoy). Fish, dairy, and confectionery products increased in price at a higher pace, as did edible oil and its products, nonalcoholic beverages, and dried fruits. This pick-up in growth was driven, among other things, by higher business expenses and the impact of the official hryvnia-to-dollar exchange rate’s adjustment on the prices of these goods as import prices went up.

The growth in services prices sped up (to 15.6% yoy). Fueled by increased demand and production costs, prices for healthcare and the services provided by beauty salons, dry cleaners, and cafes and restaurants rose faster. Prices for telecommunications services continued to grow. Housing rents went up as people returned to their homes.  This factor, aggravated by the shortage of some construction materials and labor, led to an increase in the prices of home repair services. On the other hand, the increase in prices for hotel services slowed significantly, due to the decrease in demand in relatively peaceful regions and the absence of a tourist season.

Prices for raw food products grew at a higher clip (up 40.8% from August 2021)

Vegetables (onions, beets, carrots, and tomatoes) became more expensive as supply shrank and businesses’ production costs rose. Cabbage prices remained high, underpinned by similar factors. The growth in prices for fruits, mainly imported ones, accelerated because of supply chain disruptions and the adjustment of the hryvnia’s official exchange rate in July 2022. Meat prices rose at an elevated rate, especially pork prices (as pig headcount fell) and chicken prices. The growth in cereals prices picked up amid a drawdown of stocks and a reduction in supplies. Sugar prices rose faster, fueled by expectations of a slump in production and an increase in energy prices.

The rate of growth of administered prices remained at the previous month’s level (14.7% yoy)

Prices for alcoholic beverages continued to rise, primarily due to the increase in production expenses on energy, raw materials, and containers. The increase in prices for tobacco products accelerated, but was restrained by the gradual recovery of production capacities. In contrast, utility prices were little changed in annual terms. With fuel prices stabilizing, transport services rose in price at a slower rate.

Fuel price growth continued to slow (to 68.1% yoy)

This was due to global oil price decreases and market saturation as supply chain disruptions were resolved and competition between gas stations revived.

Inflation developments remain under control. The August increase in inflation was slower than the NBU had forecast. However, the risk that inflationary processes may expand still exists, given the protracted war, supply chain disruptions, and higher production costs. In addition, the deterioration of exchange rate and inflation expectations is driving up underlying inflationary pressures despite consumer demand being generally subdued.

The NBU is therefore keeping the key policy rate unchanged at a high level and developing tools that will make it possible to further increase the appeal of hryvnia assets and maintain control over inflationary processes as the war grinds on.

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