Ukraine Watch: Inflation in June surprised to the upside
In June, inflation accelerated to 2.2% mom due to a significant increase in electricity tariffs, raising the annual rate to 4.8%. Food prices saw modest growth, while other categories also increased. Despite this, inflation remains below the NBU’s forecast of 5.4%.
Inflation in June surprised to the upside
It was already a usual practice to see positive surprises in inflation over the last 1.5 years with lower than expected readings. However, inflation in June was surprisingly high. Even though the noticeable acceleration in monthly growth in June was fully expected (especially after a solid increase in electricity tariffs by 64% mom), it actually occurred much faster than expected and amounted to 2.2% (compared to 0.6% in May). Accordingly, the annual inflation increased from 3.3% to this year’s maximum of 4.8% in June.
Monthly inflation higher than 2% was last recorded in October 2022. Afterwards, there was a clear disinflationary trend, while the monthly rate of price growth exceeded 1% only once from November 2022 to May 2024. Moreover, the rapid acceleration in inflation in June was not entirely caused by a hike in residential electricity tariffs, because a similar spike a year ago caused to increase by just 0.8%. Therefore, other pro-inflationary factors caused such a rapid CPI acceleration in June.
The dynamic in food prices was not quite strong (0.5% mom) compared to the CPI increase, with a noticeable rebound in prices for eggs (15.5%), sugar (3.2%), and sunflower oil (1.4%), following their earlier decline. Hence, their upward correction in June could not be viewed as a long-term pro-inflationary factor, while their yoy dynamic remains negative. The absence of any visible decline in the prices of fruits and vegetables indicates a rather weak seasonal effect so far.
We can treat an increase in prices of alcoholic beverages and tobacco (1.1% mom), communication (1.1%), transportation (0.8%), healthcare (0.8%), and restaurants and hotels (0.7%) as evidence of the influence of the recent hryvnia devaluation on the prices of imported goods and services. However, the largest increase was recorded in the dynamic of public utility tariffs with a 17.4% hike, which contributed 1.5 percentage points to the total CPI figure of 2.2%. In this category, besides electricity tariffs, there was also a solid increase in the tariffs for managing apartment buildings (which may reflect the increase in the minimum wage from April and the rise in electricity costs).
Even considering the noticeable acceleration of inflation in June, it still does not seem threatening, as most pro-inflationary factors were unsustainable. Moreover, the actual inflation at the end of the second quarter remains lower than the NBU forecast of 5.4% released in April. On the other hand, core inflation in June accelerated from 4.4% to 5.0% yoy, thus fully fitting the latest NBU forecast. Besides, the headline CPI returned to the NBU target range of 4%-6% after a three-month spring pause. We suspect that current inflation dynamics may alter the view of NBU monetary committee members regarding the path of the policy rate in the near term. In particular, the intention to lower the key rate by 50 bp at the next meeting on July 25 may not be so evident under current circumstances, as it was highly above market expectations, while inflation stays in its targeted range. Therefore, it may be more rational to take a pause this month, thus more precisely looking for the sustainability of current pro-inflationary factors.
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Oleksandr PECHERYTSYN
Ukraine 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.
Serhii KOLODII
Ukraine 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.
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