The rate of consumer inflation in Ukraine began to decline a little earlier than the National Bank predicted. This was reported by the press service of the National Bank of Ukraine with reference to data published by the State Statistics Service..

“The actual rate of price growth was below the trajectory of the National Bank’s forecast published in the January 2023 Inflation Report. The deviation from the forecast is primarily due to a larger-than-expected supply of raw food products..

In addition, inflation was constrained by such factors as a stable situation in the foreign exchange market and improvement in inflation expectations, including due to the measures taken by the NBU, as well as the further positive impact of the de-occupation of some regions of Ukraine.

However, fundamental inflationary pressure, expressed as core inflation, intensified in January, although somewhat less than the NBU expected.. The main reason for such dynamics is a further increase in the production costs of the business, in particular due to a shortage of electricity..

Core inflation in January 2023. increased to 23.3% y/y from 22.6% y/y in December 2022. Rise in prices for processed food products slightly accelerated (to 29.6% y/y). Against the backdrop of a shortage of electricity, prices for products with energy-intensive production grew: meat and oilseeds, butter, confectionery, soft drinks and canned food.

The increase in the price of imported food products with a long shelf life also accelerated due to higher demand and an increase in business expenses, including logistics. Sunflower oil also rose in price more quickly against the backdrop of higher export prices.

But due to the decrease in the cost of raw materials, prices for pasta grew at a slower pace.. Dairy products also rose in price more slowly, given the decrease in world prices and sufficient supply on the domestic market.

Growth in prices for non-food products accelerated as expected (up to 22.3% y/y). In particular, clothing and footwear, medicines, personal care products, household goods, electronics and cars rose in price at a higher rate..

This is due to the further depletion of stocks of imported products purchased by the July adjustment of the official exchange rate, and an increase in business costs, in particular, due to the need to purchase energy products and fuel for autonomous operation.

At the same time, a stable situation in the cash segment of the foreign exchange market, improved inflation expectations and weak and uneven demand held back the price growth for this category of goods.

The rate of growth in the cost of services increased (up to 15.5% y/y). Medical, insurance and veterinary services, catering services, Internet and cable TV rose faster, also under the influence of rising business production costs.

The cost of electricians and plumbers grew at a higher rate, which can be explained by an increase in demand for such services in the context of electricity shortages.

Gym, driver training courses, parking lots, taxis and rentals have slowed down on weaker demand.

Raw food price growth slowed to 38.5% y/y. Borscht vegetables rose in price at a lower rate due to higher demand and supply, including due to warm weather, like greenhouse vegetables, due to a sufficient supply of imported products.

Growth in meat prices has slowed down, given the decrease in the cost of feed and the difficulty of storing products against the backdrop of weak demand. Thanks to the increase in supply, the rise in the price of eggs also slowed down. Given better harvests than expected, price increases for flour, buckwheat and other cereals slowed down.

The impact of the de-occupation of part of the Kherson region and the unblocking of supplies of goods to the region from other regions of Ukraine also restrained the growth in the cost of raw food. At the same time, due to the increase in world prices and high logistics costs, fruits, in particular bananas and citrus fruits, rose in price faster..

The rise in sugar prices also accelerated under the influence of high business costs, in particular, given the need to ensure the uninterrupted operation of production in the face of a shortage of electricity.

Growth rates of administratively regulated prices decreased to 14.7% y/y. Under the influence of weaker consumer demand, the increase in the price of alcoholic beverages slowed down, and thanks to the stabilization of fuel prices, the price of transport services rose at a slower pace.

Administrative inflation was also held back by a moratorium on raising tariffs for housing and communal services for the population. At the same time, the rise in prices for tobacco products accelerated, given the planned increase in excise taxes.

Fuel price growth slowed to 61.8 y/y. This is primarily due to a slowdown in the rise in oil prices in annual terms, as well as significant fuel reserves accumulated due to fears about an increase in demand for it against the background of power outages.

Greater food supply, weaker consumer demand, the impact of the decoupation of Ukrainian regions, a stable situation in the foreign exchange market and improved inflation expectations offset the effects of growing business costs, in particular those associated with a shortage of electricity.

As a result, inflation began to decline somewhat earlier than the National Bank predicted..

NBU expects inflation to continue to gradually decline in 2023. However, in the context of a full-scale war, significant pro-inflationary risks remain..

Evidence of this is, in particular, the further acceleration of core inflation through the transfer of higher business production costs. In addition, the oversupply of food, which caused the actual inflation to deviate from the NBU forecast, was partly formed due to winter-warm weather conditions in January and may have a short-term impact.

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