Ukraine Inflation Stays Low but Rises to 2.4% YoY in June from 1.7% in May

July 14, 2020

Ukraine’s rolling 12-month “headline” inflation rose to 2.4% in June from 1.7% in May, according to State Statistics Committee data published last Thursday (Jul 9). On a month-on-month basis, the CPI edged up by 0.2% as the food category continued to demonstrate increasing prices. Meanwhile, deflation of 2.8% MoM was registered in clothing category and of 0.2% MoM in hotel & restaurant services. On the industrial goods side, UkrStat’s aggregate Producer Price Index showed a year-on-year decline of 4.6% in June; on a monthly basis, the PPI decline from May was a very substantial 2.0%. In individual sectors, the coal industry saw its prices drop by 2.5% MoM in June, and the metallurgical sector price index fell by 3.1% MoM.


The latest low inflation data indicates the ongoing demand shock to the economy of the COVID crisis. However, among major food basket categories, there was a notable price increase for imported fruits (+8.4% MoM and +50.4% YoY) which partly eroded the aggregate food price index in the reported period. As food expenses represent the lion’s share of overall Ukrainian household expenses in summer, we assume that low energy prices will be unable to restrain a rise in consumer inflation, and we expect that price increases for food, including bread which saw price growth by 0.6% MoM and 5.0% YoY in June, will spur the CPI in coming months. Another factor behind expectations of higher inflation is a possible change in the National Bank’s monetary policy after the recent resignation of central bank governor Yakiv Smoliy, who was focused on defending the value of the hryvnia. There could be a scenario of the National Bank providing cheap refinancing loans to state-owned banks in a goal to pump money into consumer lending and loans to small businesses. Although the idea for monetary stimulus for the economy looks justified in the current situation of economic contraction, Ukrainian commercial banks still charge enormous interest rates in a range of 30-40% for credit cards and 20% for small businesses. In other words, even with low inflation and the central bank key rate at 6.0%, there is no cheap hryvnia credit available in the financial system to drive economic growth. On the producer price side, there is a mixed picture, with energy-related prices on the decline while the food industry and pharmaceutical industries are seeing price appreciation for their products. UkrStat reported that overall nondurable goods grew in price by 6.2% YoY in June while the energy price index dropped by 8.7% YoY in the period.


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