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NBU January 2023 Inflation Update

NBU January 2023 Inflation Update

In January 2023, consumer inflation declined in annual terms to 26.0% (down from 26.6% in December). In monthly terms, prices increased by 0.8%. This is according to data published by the State Statistics Service of Ukraine.

The actual rates of price growth were below the trajectory of the NBU’s forecast published in the January 2023 Inflation Report. The deviation from the forecast was mostly related to larger-than-expected supply of raw food products.

Moreover, inflation was restrained by such factors as stable situation on the FX market and an improvement in inflation expectations, including due to measures taken by the NBU and the lasting positive effect of the de-occupation of some regions of Ukraine.

On the other hand, the underlying inflationary pressure, as seen in core inflation, increased in January, albeit less than expected by the NBU. The main reason behind such dynamics was the continued growth in production costs, particularly driven by electricity shortages. 

Core inflation rose to 23.3% yoy in January (up from 22.6% yoy in December 2022)

The rise in the prices of processed foods accelerated slightly, to 29.6% yoy. Amid electricity shortages, prices for energy-consuming products grew more rapidly, namely for meat and oil products, butter, confectionery, soft drinks, and canned food. Imported food products with long shelf life also grew in price faster due to higher demand and increased business costs, in particular the cost of logistics. Sunflower oil prices grew more rapidly as well on the back of rising export prices. In contrast, prices for pasta increased at a slower pace thanks to the lower cost of inputs. Prices for dairy products increased at a slower pace too as global prices decreased and domestic supply was strong. 

As expected, nonfood price growth accelerated (to 22.3% yoy). In particular, growth rates increased for the prices of clothing and footwear, medicines, personal care products, home goods, electronics, and cars. This was driven by continued depletion of inventories of imported goods procured before the adjustment of the official exchange rate in July. Another factor was the increase in business costs, particularly caused by the need to purchase energy and fuel to maintain autonomous operation. At the same time, stability in the cash segment of the FX market, an improvement in inflation expectations, and weak and uneven demand restrained price growth in this type of goods.

The growth in services prices sped up (to 15.5% yoy). Prices for the services of medical institutions, insurance companies, vet clinics, restaurants, internet and TV providers rose more rapidly, also being fueled by growth in production costs. Prices for services of electricians and plumbers increased at a faster pace as well, which might be explained by higher demand for such services amid electricity shortages. On the other hand, the rise in prices for sport club memberships, driving courses, parking, taxi services, and housing rent slowed on the back of weaker demand.

The growth in raw food prices decelerated (to 38.5% yoy)

Borshch vegetables became more expensive due to supply exceeding demand, which was driven by warm weather among other things. The same was true for greenhouse vegetables due to sufficient supply of imported produce. Growth in meat prices slowed in view of the lower cost of feed and difficulties with storing products caused by weak demand. Egg prices also grew more slowly thanks to an increase in supply. Price increases for flour, buckwheat, and other cereals slowed thanks to better-than-expected harvests. The impact of de-occupation of a part of Kherson oblast and the de-blocking of goods supplies from other parts of Ukraine to the region also restrained growth in the prices of raw foods.

At the same time, due to the rise in global prices and high logistical costs, prices for fruit went up more quickly, in particular the prices of bananas and citrus fruit. Growth in sugar prices also accelerated on the back of higher business costs, including due to the need to maintain autonomous operation of production amid electricity shortages. 

The growth in administered prices slowed, to 14.7% yoy

Growth in the prices for alcohol beverages slowed due to weaker demand. Transportation services prices grew more slowly as fuel prices stabilized. The moratorium on raising utility prices for households also restrained the increase in administered prices.

In contrast, growth in prices for tobacco products sped up due to the scheduled increase in excise taxes.

Fuel price growth decelerated to 61.8% yoy

This was primarily driven by slower year-on-year growth in crude oil prices, as well as by large inventories of fuel accumulated due to fears that demand might rise because of power outages.

Increased food supply, weaker consumer demand, the impact of the de-occupation of Ukrainian land, stable FX market, and improved inflation expectations offset the effects of higher business costs, in particular those related to energy shortages. As a result, inflation started to decline slightly sooner than forecast by the NBU.

The NBU expects consumer inflation will continue its gradual decline in 2023. However, pro-inflationary risks remain high during the full-scale war. In particular, this is evidenced by further acceleration of core inflation due to the pass through from higher production costs. In addition, excess supply of food products, which caused actual inflation to deviate from the NBU forecast, was partially driven by warm winter in January and may have a temporary effect.

The NBU will keep its monetary policy tight in order to maintain exchange rate stability, improve inflation expectations, and ensure steady disinflation.

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