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NBU August 2023 Inflation Update

NBU August 2023 Inflation Update

Consumer inflation slowed sharply to 8.6% yoy in August 2023, down from 11.3% yoy in July. In monthly terms, deflation occurred for two straight months as prices edged lower by 1.4%. This is according to data published by the State Statistics Service of Ukraine.

The actual rates of price growth were significantly below the trajectory of the NBU’s forecast published in the July 2023 Inflation Report. The accelerated pullback in inflation was primarily driven by an expanded supply of raw food products, including fruits and vegetables from the new harvest.

The growth in raw food prices decelerated sharply to 3.4% yoy

Vegetables became cheaper by 25.7% yoy thanks to the increase in supply. In year-on-year terms, all vegetables in the consumer basket, as well as certain fruits, watermelons in particular, decreased in price. The output of vegetables and watermelons increased thanks to favorable weather conditions and the growth in production volumes in some regions. Cereal and flour prices continued to fall amid low export prices and a rise in production. The more moderate increase in egg prices reflected the base effect. In month-on-month terms, however, egg prices remained unchanged due to an increase in the export of this product. Growth in meat prices decelerated a little, but prices remain high due to a tight supply and rising energy and fuel costs.

The increase in administered prices slowed to 11.6% yoy

The growth in prices for alcoholic beverages decelerated because of slowed increases in production costs amid pressure from the shadow market supply. Price increases for transportation services also continued to decelerate, thanks to lower fuel prices in previous months compared to last year. The moratorium on raising some utility prices for households continued to restrain administered inflation.

Fuel prices did not exceed last year’s levels (-0.1% yoy)

Fuel prices continued to rise in August compared to July due to the return of full taxation. However, the reduction in global oil prices in the previous months, significant fuel inventories/stocks, and intensified competition in the retail market were the factors that restrained fuel price increases.

Core inflation decreased to 10.0% yoy in August, down from 12.3% yoy in July.

The growth in prices for processed foods continued to decelerate (to 12.5% yoy). Such dynamics were driven by the further easing of pressure from business costs, optimization of production and logistics, and an improvement in exchange-rate and inflation expectations. Specifically, prices grew more slowly for meat, dairy products, bread, and flour products. Exchange rate sustainability helped restrain the growth in the prices of foodstuffs with a large share of imports, including fish products, coffee, tea, juices, candies, dried fruits, and spices. The fall in sunflower oil prices deepened because of lower global prices and export disruptions. This led to a slowdown in the growth of prices for the goods made by processing this product.

Price increases for nonfood products also slowed significantly (to 5.5%), restrained by more optimistic exchange-rate and inflation expectations. As a result, prices for personal care products, toys, furniture, home appliances, household goods, and motor vehicles went up at a subdued pace. The prices of electronic devices and clothing and footwear actually declined in annual terms. 

The growth in services prices also decelerated (to 12.6% yoy), primarily because pressure from business costs eased off. Price increases decelerated for healthcare, repairs, car maintenance, housing rentals, and the services provided by veterinary clinics, sports facilities, travel agencies, and beauty parlors. Cafe and restaurant services also became more expensive at a slower pace, including due to the slowdown in the growth of food prices.

Consumer inflation slowed faster than expected, while core inflation was close to the trajectory of the NBU’s forecast published in the July Inflation Report. These price developments were facilitated by the expansion of the supply of raw food products, as well as the improvement in exchange-rate and inflation expectations. In turn, the NBU’s measures to ensure the attractiveness of hryvnia assets and the sustainability of the FX market played an important role in curbing inflationary pressure and improving expectations.

The overall downtrend in inflation stands to continue. Among other things, this will be facilitated by the effects of better harvests, the fixing of some utility tariffs, and the NBU’s consistent monetary policy. Although inflation at the end of the year will probably be lower than the NBU’s July forecast, little to no potential is left for a rapid slowdown in price growth.

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