National Bank of Ukraine Comments on the April 2016 Inflation Figures

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Data released by the State Statistics Service of Ukraine suggest that, as expected, twelve-month headline inflation slowed to single-digits, reaching 9.8% y-o-y in April, down from 20.9%  in March 2016. In monthly terms, headline inflation stood at 3.5%.

The elimination of preferential natural gas tariffs for households, effective through 31 March 2016, was the major contributor to the m-o-m rise in prices.  As a result, a 48.4% m-o-m increase in natural gas prices was the largest contributor to monthly inflation.

The April 2016 inflation figures also reflect higher prices for alcoholic beverages, tobacco products and fuel, which was broadly in line with the NBU’s expectations.  Thus, prices for alcoholic beverages rose by 1.8% m-o-m in April, reflecting primarily the delayed effects of increases in excise taxes effective 1 March 2016.

Higher excise taxes on alcoholic beverages were reflected in the prices of alcoholic beverages  with a lag due to the strong growth in the production of alcoholic beverages prior to the imposition of a higher excise tax. Second, the state-owned company Ukrspyrt increased prices for its products by 19%, effective from 1 April 2016. Also, tobacco prices rose by 3.5% m-o-m in April. Thus, the NBU’s initial assumptions that tobacco producers would increase prices after a prolonged period of sticking with the strategy of keeping prices low proved right.

The expected decline in raw food prices (by 0.3% m-o-m) were keeping inflation pressures well contained. Further decline in prices for these commodities was attributed to the supply of greenhouse fruit and vegetables of this year’s harvest to the domestic market, as well as lower prices for imported raw foods amid the appreciation of the hryvnia. Furthermore, Ukraine saw no seasonal pick up in prices for eggs  ahead of Easter holidays. Egg prices declined by 15.2% m-o-m due to the increased supply of eggs in the previous months.

Core inflation in April slowed to 0.6% m-o-m, bringing the y-o-y reading to 10.6%, which was in line with the NBU’s projections.  Modest core inflation reflected the strengthening of the hryvnia and weak consumer demand. In particular, the prices of imported goods that are included in the core CPI, such as household appliances, pharmaceuticals, audio equipment, photographic equipment, and data processing equipment, increased at a slower pace in April. As expected, prices for clothing and footwear lost ground, increasing at a slower pace of 1.7% m-o-m.

According to the NBU’s estimates, the end-year headline inflation target of 12 +/-3 % y-o-y is within reach.  This being said, given the elimination of preferential  natural gas tariffs for households in April and upward adjustment of tariffs for heating and hot water recently announced by the government,  administered prices are expected to be a major contributor to inflation.

However, their impact will be largely offset by a longer-lasting effect of supply-side factors exerting downside pressures on  prices for raw foods than it was reflected in the NBU’s current forecast. Furthermore, adjustment of tariffs to the economically justified levels this year, rather than postpone it until next year as planned, will make it easier for the NBU  to meet its end-year inflation target for 2017 (8 +/-2% y-o-y).

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