Inflationary pressures are a key downside risk to the Ukrainian economy
According to a Moody`s Economy report
Ukraine`s consumer price growth rebounded in September, with a month-on-month increase of 2.2%, up from 0.6% a month earlier, according to a report of Moody’s Economy, forwarded to UNIAN. Higher food prices and services costs helped drive up overall price growth. In annual terms, inflation remains elevated, coming in at 14.4%, up from 14.2% in August.
Ukraine consumer prices rebounded to 2.2% in September, from 0.6% a month
earlier. In annual terms, price growth came in at 14.4%, up from 14.2% in August. In
the first nine months of 2007, price growth has amounted to 11.9%.
Food prices regained strength during the month, rising to 3.0% m/m, up from 0.9% in
August. While in annual terms, food prices rose 15.4%, up from 13.3% previously.
Non-food prices rose 0.4% during the month, up minimally from 0.3% in August. In
annual terms, non-food prices rose 1.1%, in-line with the previous month`s rate.
Services price growth also regained strength, rising 2.2% m/m, up from 0.5% in
August; while coming in a massive 27.5% in annual terms, though this is down on the
32.2% recorded a month earlier.
As in neighboring Russia, inflationary pressures are a key downside risk to the Ukrainian economy at the present time. It is highly unlikely that the government will meet its inflation target of 7.5% this year, down from 11.6% in 2006; and the OECD recently warned that Ukraine’s economy may slow if the government fails to control inflation.
Both the central bank and government are looking to set next year’s inflation target even
lower at 6.8%. As such, given the central bank’s use of exchange rate to control inflation, the bank is looking to hold the hryvnia vis-à-vis the U.S. dollar in a trading band of between 4.95 and 5.25. The OECD has however warned that the exchange rate system “is now contributing to increasing inflation volatility” and should be allowed to trade more freely.
Having broken all of its targets on reducing inflation since 2003, this further ambitious
objective also risks not being met. Proposed food price controls will help but high energy prices are certain to impact to some degree. Gas and petrol prices remain elevated, a development which is doing little to ease the situation for the 7.9% of the population who live in absolute poverty.
First Vice Prime Minister, Finances Minister, Mykola Azarov, does however predict stable price for gas heading forward, despite the likely rise of the imported gas price. The state budget is providing two billion hryvnias to compensate households for such hikes. Notably, Gazprom and Kiev have resolved their recent payment dispute which threatened to cut gas supplies to the country.