In September, Ukraine’s consumer prices went up by 2% m/m driven by the growth of food prices and seasonal factors. Prices for food went up by 2% m/m. As a result, inflation accelerated to 16.4% y/y from 16.2% y/y in August and analysts wonder if the central bank will raise rates as a result.
The major driver of growth was the sharp decline in the supply of eggs to the domestic market (due to growth in exports) that resulted in a price hike of 31% m/m in September after a rise of 18% m/m in August. Moreover, prices for meat and milk increased by 3.4% m/m and by 2.9% y/y.
On the other hand, there was seasonal decline in prices for vegetables (-3.4% m/m) and fruits (-0.3% m/m).
As for non-food products, seasonal factors adversely affected prices for clothes and education, which grew by 8.9% m/m and 12% m/m respectively.
“We see growing risk, that inflation target (8% +/-2pp eop) for this year will not be met. According to our estimates, inflation rate may decelerate to 11% y/y by the end of 2017 with significant upside risks. Nevertheless, in our view, inflation will return to the targeted trajectory next year, and inflation will decelerate to 6.5% y/y by the end of 2018,” Sergii Drobot, an analyst with Raiffeisen Bank International (RBI), said in a note.
The jump in inflation came as a nasty surprise and analysts are wondering if the National Bank of Ukraine will react or write the increase off as a one-off due to the weather.
“The key question now is whether Ukraine’s central bank (the NBU) will react to the current inflation’s sharp divergence from its forecasted trend. Recall on September 14, the NBU stated it won't rule out a possible hike in its key rate if inflation expectations worsen. So far, we do not expect any increase in the key rate at the NBU’s meeting on October 26, but such a risk exists,” Alexander Paraschiy of Concorde Capital said in a note.
Earlier this year, the National Bank of Ukraine (NBU) upgraded the inflation forecast for the full-year from 8% year-to-date to 9.1% YTD with the benchmark ranging between 8% +/- 2 percentage points (pp). In September, the NBU said it sees "increased risks" to financial stability due to the fact that inflation may deviate more significantly from the mid-point of the central bank's target range.
On October 10, the regulator said in a statement that "the new inflation forecast and a time horizon for the return of inflation to the target with the help of monetary tools" will be announced after an NBU board meeting on monetary policy on October 26.
September's result was attributed to soaring prices for food (2.0% m/m growth, or 18.8% y/y), clothing and footwear (8.9% m/m growth, or 0.8% y/y), alcohol and tobacco (2.7% m/m, or 25.8% y/y) and education (12.0% m/m, or 15.7% y/y). The food price surge reflected a 31% jump for eggs and a 3.4% increase for meat.
"The actual price growth exceeded our projections, Alexander Paraschiy at Kyiv-based brokerage Concorde Capital wrote in a research note on October 10. "Food prices reflect the consequences of weather conditions and tendencies at the global markets. Prices for clothing and footwear followed the hryvnia depreciation trend. Prices for alcohol increased due to hiked minimum prices. Education prices grew due to rising wages for teachers and lecturers."
The expert sees the additional inflation risk in 2017 from rising pensions, which began to be increased as of mid-October after parliament approved a reform package in early October . "By November, about 5.6mn pensioners will be receiving higher pension payments," Paraschiy wrote in the note.