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Ukraine Watch: March CPI reaches lowest level since November 2020
Inflation fell sharply in March from 4.3% to 3.2% yoy. A slight drop in food prices was the main factor behind this, which was not in line with traditional seasonal trends. We have adjusted our annual inflation forecast for 2024 from 9.0% to 7.5%.
YoY CPI in March reached its lowest level since November 2020
Inflation continues to deliver surprises, which was the case for more than over the last twelve months. Hence, the monthly inflation rate in March was much better than expected, recording just 0.5% vs market consensus forecasts of 1.0%.
Methodological specifics in the accounting of prices for clothing and footwear as well as a seasonal uptick in food prices usually raise the monthly inflation in March to levels much higher than the one in February. For example, a monthly inflation rate in March of 1.0% or higher was recorded for eight years straight since 2014. Hence, the monthly inflation this March was the lowest seen in March for over eleven years. Moreover, the much better current CPI figure vs March 2023 allowed an acceleration of the downward trend in annual CPI to 3.2%, from 4.3% in February, which is the lowest figure since November 2020.
We think the monthly decline in food prices (-0.2% mom) was the main factor behind the inflation surprise last month. Although many items in this category recorded a minor increase in prices (with fruit prices rising seasonally by 4.1% mom), this dynamic was quite easily offset by non-seasonal patterns like a continuing significant drop in prices for eggs (-16.4% mom), sugar (-2.5%), and sunflower oil (-1.5%), and a moderate decline in prices for vegetables (-0.6%) and milk (-0.3%). We see the expansion of domestic supply (enhanced also by the blocking of western export routes) and the limited potential of demand to expand as primary reasons for the current dynamic in food prices.
It was rather unusual to see a drop in prices for household goods and appliances in March (-0.4% mom and -0.9% yoy) if considering the high share of imports in this category and moderate hryvnia depreciation in recent months. On the other hand, an increase in fuel prices by 2.7 mom reflected both upward correction in global prices and the hryvnia devaluation. Although clothing and footwear prices followed methodological differences in the calculation of seasonal changes (by showing a 12.9% mom hike in March), their yoy prices declined by 6.7%, which is still a reflection of rapidly weakening demand over the last twelve months.
Better-than-expected price developments in the first quarter of this year allowed us to adjust our inflation forecast for the end of 2024 upwards from 9.0% to 7.5%. However, we continue to expect that the disinflationary trend (although somewhat stronger than the forecasted one) has finally exhausted its potential over the first quarter of 2024. Therefore, we expect inflation to start picking up in April, primarily due to the low base effect and continuation in some seasonal patterns for food products. Because the CPI in March was better than the NBU forecast, we see an increasing probability that the regulator would continue its cautious monetary easing. Hence, we expect another 50bp cut in the key rate to 14% at the next meeting on 25 April. At the same time, the absence of a joint view among members of the NBU monetary committee at its meeting in March also raises chances for a stronger response to low inflation soon.
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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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