NBU: Inflation in Ukraine slows down sharply in H1

Inflation in Ukraine slowed sharply in the first half of the year, driven by the National Bank of Ukraine's (NBU) measures to ensure exchange rate stability, sufficient domestic food supply, and rapid business adaptation to the new challenges of Russia's war.

According to Ukrinform, NBU reported this.

"In the first half of the year, inflation in Ukraine slowed down rapidly. This was largely facilitated by NBU's measures to ensure exchange rate stability, sufficient domestic supply of food and fuel, lower global commodity prices, including energy, and rapid business adaptation to the new challenges of Russia's war," the statement said.

The potential for inflation to decline, albeit at a more moderate pace, remains. At the same time, the risks of increased pro-inflationary pressures are high in the context of the war, in particular due to the destruction of infrastructure and environmental terrorist attacks by Russia. For example, the consequences of the destruction of the Kakhovka hydroelectric power plant have not yet affected consumer inflation but may have negative effects later. Pressure on consumer prices may also increase as a result of changes in pricing in the electricity market for non-household consumers.

In June 2023, consumer inflation in annual terms (yoy) continued to slow down to 12.8% from 15.3% in May. Month-on-month, prices increased by 0.8%. In June, core inflation declined to 13.7% yoy from 15.6% yoy in May.

The rise in prices for processed food products continued to decelerate sharply (to 14.7% yoy). These dynamics primarily reflected a decline in pressure on business costs, particularly logistics, as well as raw materials and energy, given their ample supply. Prices for bread and bakery products grew more slowly. In addition, amid lower global prices and weak demand, as well as uncertainty about restrictions on exports to neighboring EU countries, dairy products grew at a slower pace, while sunflower oil fell in price year-on-year. The exchange rate stability helped to slow the growth in prices for products that have a significant share of imports in their cost, including fish products.

The growth in prices for most non-food items also slowed (to 12.2%), driven by improved inflation and exchange rate expectations amid favorable FX market conditions. As a result, prices for furniture, household appliances, tableware, clothing and footwear, cars, electronics, and personal care products grew at a slower pace. The growth rate in the cost of services also declined (to 14.2% yoy). The prices at cafes and restaurants, healthcare facilities, beauty salons, and veterinary clinics rose more slowly. This is due to the easing of pressure on business costs, as well as the stable situation in the FX market.

The rise in administratively regulated prices accelerated to 12.5% yoy. This was primarily driven by an increase in electricity tariffs for households. In contrast, the rise in prices for alcoholic beverages slowed down under the influence of a stable FX market. In addition to the exchange rate factor, this likely reflected pressure from grey supply. The growth in prices for transportation services continued to decelerate due to lower fuel prices. In addition, administrative inflation continued to be restrained by the moratorium on raising tariffs for certain housing and utility services for households.

As reported, in April 2023, consumer inflation slowed to 17.9% in annual terms from 21.3% in March. According to NBU's May forecast, inflation is expected to decline sharply in Ukraine in the first half of 2023. By the end of the year, it will slow to 14.8%.