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Ukraine Watch: Inflation acceleration lowers chances for monetary easing
Inflation accelerated quite strongly in August to 7.5% yoy, exceeding our and market expectations. Core inflation also accelerated, reflecting the impact of several pro-inflationary factors. We have increased our inflation forecast for the end of 2024.
Sharp acceleration of inflation in August lowers chances for monetary easing this year
We did not forget the rather long period of positive inflation surprises over November 2022 – April 2024 (when actual inflation was visibly better than forecasts), but we already started to notice the opposite trend, which strengthened substantially last month. Indeed, the actual monthly CPI dynamic of 0.6% in August was not only visibly worse than both our and market consensus forecasts (0%), but it also increased to the second-highest monthly inflation in August recorded over the last 10 years.
The change in annual inflation in August looks even more pronounced than its monthly reading. Even though we expected its visible acceleration due to strong and non-trivial deflation of 1.4% in August 2023, the magnitude of its enlargement in one month from 5.4% to a twelve-month maximum of 7.5% may look even more worrisome in terms of revaluing the impact of inflation risks till the end of this year. Moreover, yoy CPI in August has already reached our inflation forecast for the end of this year.
The acceleration in inflation was driven by a narrower supply of food products due to high temperatures and severe drought in summer. Thus, egg and vegetable prices edged up by 7.1% mom and 5.2% respectively. A seasonal drop in fruit prices (-7.4% mom) partially offset this negative effect, but this was not enough, with monthly food inflation (0.9%) exceeding the overall CPI in August.
The monthly core inflation (0.7%) in August exceeded the headline one, with its annual dynamic accelerating to 6.5%. This means that fundamental macroeconomic factors related to hryvnia devaluation, electricity supply problems and labour supply deficit were among the main drivers of the price increase in August. We think the aforementioned factors contributed to the expansion of production costs, which businesses started to pass on to final consumers. We do not have the statistics of the producer price index for August yet, but its yoy figure for July recorded its acceleration to 33.6%, thus indicating the likely cause of the recent dynamic in CPI.
We believe that the impact of pro-inflationary factors was the most pronounced in August. Thus, we expect a weaker trend in growing inflation by the end of the year. However, the recent increase in excise taxes for fuel, the pass-through effect of high production costs on final consumers and a potential hike in tax rates would keep inflation moderately growing in the coming months. Therefore, we had to increase our inflation forecast for the end of the year from 7.5% to 9.2%, with a moderate adjustment of average inflation for this year from 5.2% to 5.9%. This is a strong argument for the NBU to not touch its policy rate in 2024. Therefore, we adjust our policy rate forecast for this year to 13.0%, respectively. Even though we keep our year-end CPI forecast for 2025 unchanged at 8.0%, recent inflation acceleration and some additional pro-inflationary trends in the coming months increased our forecast of average inflation for 2025 from 7.8% to 9.3%.
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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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