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NBU March 2021 Inflation Update

NBU March 2021 Inflation Update

In March of 2021, consumer inflation accelerated to 8.5% yoy (up from 7.5% yoy in February). In monthly terms, prices grew by 1.7%. This is according to data published by the State Statistics Service of Ukraine. 

Actual consumer inflation came out higher than had been projected in the January 2021 Inflation Report. Inflationary pressures were generated by the rise in prices for certain foods and fuels and sustained consumer demand. However, inflation was somewhat constrained by a price ceiling for natural gas.

  • Core inflation accelerated (to 5.9% yoy from 5.6% yoy in February).

Price increases for processed food products sped up (to 8.7% yoy), driven primarily by higher global prices for certain foods. In particular, sunflower oil continued to sharply rise in price. Rising costs of raw materials and energy led to higher prices for mayonnaise, margarine, spread, bread, and flour products. Sustained consumer demand and higher production costs drove higher the prices of butter, sweets, and dairy and meat products. Fish products, dried fruits, and nonalcoholic beverages also increased in price.

The growth in services prices accelerated (to 7.3% yoy), underpinned by consumer demand, which remained strong despite tighter quarantine measures in some regions and higher production costs. Specifically, the services of cafes and restaurants, dry cleaners, and beauty salons became more expensive, as did cinema tickets. Prices for driving lessons and taxi rides continued to go up as demand increased against the backdrop of long-term quarantine restrictions and higher fuel prices. 

Nonfood prices rose less quickly (by 1.8% yoy). This reflected a slowdown in pharmaceutical prices and a further reduction in the cost of personal care and cleaning products. As the effects of last year’s weakening of the hryvnia faded, prices for computer hardware declined. In addition, the growth in the prices of cars slowed. At the same time, household appliances, furniture, and jewelry became more expensive, while price decreases for home textiles, tableware, and TVs decelerated. This may have been due to stonger demand for these goods amid tightening quarantine restrictions. Prices for clothing and footwear continued to decline at the previous month’s rate. 

  • Growth in raw food prices picked up (to 11.8% yoy).

Production cuts and more expensive feed resulted in meat prices increasing significantly, especially those for chicken, beef, milk, and eggs. With rising global prices and smaller harvests of sugar beet and wheat, prices for sugar and flour became markedly higher. Price increases for bananas also accelerated, fueled by higher import prices. In addition, because of a drawdown of stocks, prices for cabbage, beets, and carrots, rose more rapidly, and potato prices fell more slowly. At the same time, the fall in onion prices deepened due to a significant supply. Garlic and lemons also fell in price more significantly, due to a high base of comparison: last year, their prices surged in response to panic buying as households rushed to stock up on these foods after the lockdown was imposed.

  • Administered prices rose at a higher pace (by 13.0% yoy).

Despite the government’s cap of natural gas prices for households, these prices accelerated amid a low base of comparison. The same factor spurred the growth in the prices of hot water and heating supplies. Increased production costs (fuel prices and wages) and reduced passenger traffic due to quarantine restrictions led to higher prices for motor vehicle transport services. Slower increases in tobacco prices amid a more ample supply restrained administered price inflation somewhat.

  • Fuel prices increased sharply (by 12.2% yoy), driven by higher global oil prices and sustained robust demand from the public.

In the next few months, significant inflationary pressures will persist due to the pass-through effects of high global food prices, elevated energy prices, and growing consumer demand even as the lockdown remains in force. 

In Q4 2021, inflation will start to descend and will reenter the 5% ± 1 pp target range in H1 2022. This will occur thanks to the new harvest supplies coming to the market, the effect of a low comparison base fading for some products, and the impact of the NBU’s key policy rate hike. 

A detailed macroeconomic forecast will be published in the central bank’s Inflation Report on 22 April 2021.

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