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Ukraine Watch: Inflation returns to single-digit territory in August

Inflation returned to single-digit in August slowing to 8.6%. Main factor was a sharp decline in vegetable prices, which came to a 20-year record monthly deflation for August (-1.4%). Disinflation will add to the arguments for continuing the monetary easing cycle this Thursday.

Inflation in August returns to single-digit territory earlier than expected

Even though deflation in August usually represents a seasonal pattern (i.e. it was recorded seven times over the last ten years), it was rather unexpected in terms of both numbers (i.e. -1.4% mom is the second-largest figure over August historically) and time (i.e. during the active warfare). We think a very strong decline in vegetable prices by 38% mom was the main factor behind this dynamic. Definitely, good harvest volumes and increasing harvesting yields (due to favourable weather conditions) contributed to this phenomenon. It is also worth noting the positive impact of the liberation of the right bank of Dnipro in the Kherson region (which reduced risks for adjacent agricultural regions) and the partial relocation of production facilities after the war started.

Chart 1 - Inflation and NBU policy rate
Source: NBU, RBI/Raiffeisen Research

The total monthly drop in food prices reached 3.9% in August, while they increased by 8.4% in annual terms, which is close to the annual inflation rate in August. Indeed, annual CPI returned to the single-digit area for the first time in the last two years and recorded its lowest level since May 2021. Core CPI was recorded at 0% mom for the second month running, while it dropped rather visibly in yoy terms (from 12.3% to 10.0% then) due to improving comparison base effect. It is worth noting that rising global oil prices and the return of pre-war fuel taxes preserved core CPI behind its headline reading for the fourth month in a row. Definitely, the return to pre-war fuel taxation did its job by raising fuel prices by 7.4% mom. But this was the only solid pro-inflationary factor in August, thus offsetting the trend in vegetable prices just partially. However, both these trends are not sustainable. Hence, they can be changed rather quickly in the coming months due to two factors: 1) the seasonal hike in fruit and vegetable prices closer to year-end and 2) the hike in fuel prices is almost exhausted, so their impact will not be as strong in the coming months.
According to our estimates, the return of CPI to the single-digit area should have happened somewhat later, i.e. closer to the end of the year. However, we keep our annual inflation forecast for 2023 at 9.3% yoy unchanged so far, even though the probability of its improvement is growing. Indeed, the main disinflation factors are almost exhausted this year, while pro-inflationary factors (like imported inflation in case NBU decides to correct the exchange rate upwards) remain moderately high.
The latest news on the inflation front provides additional support to our view on the NBU key rate cut by 200 bp to 20% this Thursday, but we do not think this may be an argument for a more aggressive key policy rate cut then. In particular, the dynamic of core inflation (10.0% in August) is in line with the NBU forecast (9.5% in 3Q23), which should provide concerns to NBU on a more aggressive key rate cut this week.

Chart 2 - Contribition to CPI (pp)
Source: Ukrstat, RBI/Raiffeisen Research

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Oleksandr Pecherytsyn is the Head of Research in Raiffeisen Bank Ukraine. He joined the team in February 2022. He has more than 20 years of experience in the banking sector and macroeconomic research. Before taking on the current position, he worked as Chief Economist in Credit Agricole Ukraine for 9 years. Previously, he worked for ING Bank and Alfa Bank. He is MA in Economic Theory obtained in National University Kyiv-Mohyla Academy.

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Kolodii Serhii is a macroeconomic analyst at Raiffeisen Bank Ukraine focusing on analysis and research of Ukraine economy. He joined research team in May of 2020. Prior to joining Raiffeisen Bank, Serhii worked as a professor in Banking University (Kyiv) and has been having a long experience in economic education. He holds a PhD from the Ukrainian Banking Academy of National Bank of Ukraine and is an author of more than 120 scientific publications, especially focusing on fiscal policy and local budget topics and has a passion for public choice theory and economic history. Outside the office, Serhii prefers playing Ping-Pong and football, enjoying hiking and travelling with family.