Moody's Economy.com -

Ukraine's consumer price growth accelerated in the first month of the new year, gaining 2.9% on month, from 2.1% a month earlier. In annual terms, inflation jumped to 19.4% from 16.6% in December. Food prices were once again the key upward driver, while higher utility bills are also impacting.

The numbers

• Ukraine consumer prices rose 2.9% in January 2008, from 2.1% a month earlier. In annual terms, price growth came in at a massive 19.4%, up from 16.6% in December.

• Food prices strengthened significantly during the month, rising to 4.3% m/m, up from 2.8% in December, while in annual terms, food prices jumped 28.5%, up from 22.9% previously.

• Utility costs noted a 1.4% on month uptick during the first month of the new year, while increasing 13.1% in annual terms.

• Producer prices rose 2.3% on month in January 2008, down from 3.2% in December. In annual terms, price growth held at a significant 23.3%.

• Money supply growth of M3 jumped a massive 51.7% for 2007 as a whole.

• In December 2007, the real wages and salaries of employees increased by 10.5% m/m. The real available income of the population increased by 12.5% in January to November 2007 compared with the same period of 2006.

• The National Bank of Ukraine opted to hike interest rates a full two percentage points to 10% on January 1, 2008. This brings an end to the monetary loosening stance adopted since October 8, 2005.

Behind the numbers

Ukrainian consumer price growth remains elevated. Energy price hikes and elevated food costs helped drive up inflation for much of 2007 and will maintain significant pressure through much of this year. Gazprom, Russia's natural-gas export monopoly, hiked the price Ukrainian consumers and households pay for gas imports by 38% at the beginning of the year.

Further pressure in 2008 is expected to come from public spending initiatives. According to the draft state budget for 2008, social welfare and infrastructure spending is set to be a key government priority. This will certainly add to inflationary pressures, which are a major downside risk to economic growth this year. Official forecasts are for GDP growth of 6.8% in 2008, while targeting an optimistic 9.6% inflation rate. Price growth for 2007 came in at 12.8%, well in excess of the targeted 7.5%.

The National Bank of Ukraine hiked interest rates a full percentage point at the beginning of the year to 10%. With producer prices remaining elevated, suggesting that further upward feed through to consumer prices can be anticipated, and high wage demands threatening to induce a very damaging wage-price spiral, further monetary policy tightening cannot be ruled out.

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