Experts predict Ukraine may see inflation accelerate

Experts with Investment Capital Ukraine (ICU) Group say inflation in Ukraine may further accelerate amid rising prices of food and energy.

That is according to ICU Weekly Insight published on March 15.

"We expect further increases in food and energy prices to keep fueling inflationary pressures. At the same time, the ongoing strengthening of the UAH [hryvnia] exchange rate and more precautionary behavior of the population against the background of a growing likelihood of new lockdown restrictions will be important deterrents. In addition, we still expect that the ongoing food price spike should unwind in the second half of the year," the report said.

Read alsoWeek's balance: Rising inflation, Motor Sich nationalization, and higher tariffs by Nova PoshtaThe further rise in Ukraine's inflation to 7.5% in February year-over-year (y-o-y) was primarily driven by higher food and fuel prices. This fast-paced trend of price growth is likely to continue in the coming months, which will lead to a further increase in the key policy rate by the National Bank of Ukraine (NBU).

Causes behind price hikes

The main factor behind the acceleration of inflation was a sharp rise in food prices, which is observed not only in Ukraine, but also worldwide. Given the high share of food products in the consumer basket (41%) and the openness of the economy, domestic inflation is extremely sensitive to these global trends. In addition, fuel prices have risen sharply in recent months.

"Instead, the gradual strengthening of the UAH exchange rate and the economy's capacity underutilization induced by COVID-19 pandemic contained fundamental inflationary pressures. In addition, inflation was affected by the government's restriction on the gas price for households, which was reflected in the CPI [consumer price index]," the report said.

Given such inflationary trends and the gradual economic recovery, the NBU is highly likely to raise the key policy rate again, to 7%, but then take a wait-and-see attitude, experts say.

At the same time, if the current surge in inflation, even against the background of a certain strengthening of the hryvnia's forex rate, affects inflation expectations, the NBU will be forced to act more aggressively. Moreover, the current rise in U.S. Treasury yields and the lack of significant progress in negotiations with the International Monetary Fund have significantly tilted the risks toward a tighter response from the NBU.

Background

Consumer inflation in Ukraine in February 2021 vs February 2020 accelerated to 7.5% from 6.1% in January 2021 vs January 2020, according to the State Statistics Service.