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Ukraine Watch: Has inflation finally bottomed out?

Inflation brought another surprise to the market with just 0.2% mom and an unchanged annualized CPI at 3.2% yoy in April. But core inflation denoted a more visible acceleration (4.4% yoy), showing some potential for pro-inflationary factors. We maintain our inflation forecast.

Has inflation finally bottomed out?

The dynamic of consumer prices brought another surprise to the market in April, with consensus forecasts expecting 0.7% mom and 3.7% yoy. However, the actual figures appeared much more benign, with a 0.2% mom increase and a steady yoy figure, at 3.2%.

Inflation and key policy rate
Source: Ukrstat, NBU, RBI/Raiffeisen Research

More in line with market expectations was the halting of the declining pattern, albeit not combined with the acceleration that analysts' were expecting. However, core inflation revealed a more pronounced uptick than headline inflation. Particularly, the rather modest mom hike in core inflation (0.7%) has finally resulted in a growing dynamic in its yoy reading to 4.4% in April (from 4.2% a month before). This could be an early indicator of strengthening pro-inflationary forces at a fundamental level.

The price dynamics of food products (representing 41% of the consumer basket) were again the main factor behind the main inflation surprise, with food prices declining by 0.4% over the month and representing a dynamic opposite to usual seasonal trends. Moreover, food products demonstrated a deflation in yoy terms (-0.8%) in April. A negative monthly development in food prices in April was last observed in 2013. The price of eggs again demonstrated a solid drop over the last month (-19.2%), which contributed 0.2pp to the decline in headline CPI. Moreover, egg prices are 42% cheaper than a year ago, which is highly unusual for this market. It was also quite unexpected to see a 3.6% mom decline in prices for "other goods and services", which may indicate a limited recovery in demand from households, probably, because of strong defence risks since the start of this year.

Contrary to evident trends in declining prices, we also noticed a hike in prices for clothing (by 0.5% mom), footwear (1.3%), healthcare (14%) and transport services (2.1%). In particular, the price of fuel (up by 3.7% mom) partially reflects the trend in global oil prices at the beginning of April. However, the dynamic of global prices in recent weeks allows us to see a more favourable environment for this category in May.

Contribition to CPI (in pp)
Source: Ukrstat, RBI/Raiffeisen Research

Even though the inflation rate in April was better than we expected, we see an increasing probability that it will be closer to our forecasts in May. In particular, recent statements of state officials raise the likelihood of an upward correction in gas and electricity prices in May-June. The government may also raise excise taxes on fuel and some other excisable goods, thus accelerating the upturn in prices for them. Even though the actual inflation figure for April shifts the balance of risks to our 7.5% year-end forecast slightly towards lower inflationary pressure, heightened security risks could offset this upside rather quickly. On the other hand, the surprising inflation in April may raise the probability of an additional 50bp cut in the policy rate at the next NBU monetary committee meeting on 13 June.

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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.