March inflation rise caused by poor harvest, fuel price hikes – experts

The Center of Macroeconomic Modeling at Kyiv School of Economics (KSE) says in March 2021 inflation in Ukraine accelerated to 8.5% year-over-year (y-o-y) due to a poor harvest in 2020, which triggered price hikes for vegetable raw materials, and a rise in fuel prices.

Growing prices of vegetable raw materials, in particular, grain affect those of other foodstuffs. The cost of food products over the period under review increased by 2.2%, while the prices of clothing and footwear climbed by 12.7%, according to the Center's monthly review.

"It's quite possible that a higher harvest this year will lead to a decline in raw material prices and a decrease in inflation by the end of the year, but energy prices will only grow with the recovery of the global economy," the document said.

According to KSE experts, the rise in prices of food, utilities, and transportation services was higher compared to March 2020. Thus, the contribution of prices in the said sectors to annual inflation stood at about 5% (food), and about 1% (utilities and transportation) each.

Meanwhile, the National Bank of Ukraine (NBU) responded stronger to the inflationary risk, increasing the key policy rate to 7.5%. Most analysts expected a 7% rise. That is, the NBU's reaction turned out to be tougher.

"Despite the fact that the current inflation is caused by supply factors, a 7.5% increase in the key rate by the National Bank will not significantly affect prices. But such a measure was necessary in terms of compliance with the inflation targeting policy," KSE experts said.

Background

Consumer inflation in Ukraine in March 2021 vs March 2020 accelerated to 8.5% from 7.5% in February 2021 vs February 2020.