Inflation and property ownership in Ukraine: future prospects

In May, inflation continued to accelerate and exceeded the National Bank of Ukraine’s forecasts.

Annual consumer inflation for May reached +15.9% (compared to 15.1% in April 2024). Monthly inflation for May 2025 was +1.3%, while in May 2024 it was only +0.6%. To meet the NBU’s half-year forecast of +13.7%, prices in June must rise by only +0.2%, whereas the average monthly inflation rate has been around +1.1% for a year. Additionally, there is a huge inflationary pressure from industrial inflation, which stands at +41.6% year-on-year.

Inflation structure. The variation in price increases across different goods and services exceeds 40 percentage points: from a 5% deflation in light industry goods to an 86% inflation in egg prices. Relatively high price growth (over 20%) was recorded for electricity (+64%), bread (+22%), vegetables (+36%), fruits (+34%), butter (+29%), and sunflower oil (+35%). In contrast, price growth is nearly absent for leisure services (+1%), several utility services (0-3%), household items and appliances (+2%), railway passenger transport (+5%), and automobile fuel (+1%). This indicates that the NBU’s interest rate policy has no fundamental impact on inflation trends.

A key feature of Ukrainian inflation is the cost-driven nature of price growth. Over the past year, the country has seen significant increases in unit costs for energy, power supply, and transportation. Costs for imported goods have also risen due to the hryvnia’s devaluation. The economy continues to suffer war-related losses, leading to additional expenses.

The economy has also been affected by adverse weather conditions impacting the harvest. Meanwhile, per capita consumer demand remains below the pre-war level (only 91%). Consumer demand is gradually recovering but remains asymmetrical due to ongoing war factors and is mainly focused on essential goods.

Monetary policy factor. For the third consecutive year, the National Bank of Ukraine (NBU) maintains ultra-tight monetary policy parameters. Since March 7, the key interest rate has been raised to 15.5% annually, and since April 4, the rate on three-month deposit certificates increased to 19.0% annually.

However, the NBU’s key interest rate does not affect inflation, as inflation drivers remain mostly structural (not demand-driven), and the transmission channels of monetary policy are very weak.

Flexible exchange rate policy factor. After shifting from a fixed exchange rate regime to a managed float regime, the hryvnia depreciated by 14.5% (peaking in November 2024), triggering a devaluation-inflation spiral and intensifying annual inflation. The ill-conceived and rushed currency liberalization policy has acted as an additional inflationary factor in Ukraine.

The hryvnia’s devaluation results from directive decisions by the NBU, not from market exchange rate fluctuations; therefore, the key interest rate currently does not affect the currency channel of monetary transmission.

Fiscal deficit factor. The fiscal deficit remains high (over 20% of GDP). However, the size of the deficit is driven by war-related needs, not by the cost of domestic borrowing. It compensates for the loss of aggregate demand caused by the war, which can potentially lead to price increases. Over 90% of the fiscal deficit is covered by external sources. Thus, the key interest rate cannot influence the fiscal channel of inflation dynamics.

War inflation factor. Due to the war, consumer priorities and producer cost components have changed. People reduce demand for non-essential goods (e.g., light industry products, entertainment services). Businesses increase expenses on logistics, energy supply, etc. The NBU’s key interest rate cannot influence these war-related inflation factors, which are non-market by nature.

Conclusion on inflation factors.

The majority of inflation drivers in Ukraine lie beyond the reach of the NBU’s monetary instruments. The NBU’s spending on monetary policy from 2022 to 2025 totaled about 240 billion UAH, including 76 billion UAH in 2024 and 33 billion UAH from January to May 2025.

Inflation Outlook. Currently, both inflationary and disinflationary factors are influencing the inflation rate. Inflationary factors include high producer price growth, weather conditions, significant fiscal deficit, increased rates of certain taxes, and the release of deferred demand if hostilities cease. Disinflationary factors include a significant economic slowdown (only +0.9%), the continuation of the moratorium on raising certain utility tariffs, relative exchange rate stability, potential reduction in import costs due to the US-China trade war, and demand restraint if the war continues. From June, a slight decrease in inflation is expected, mainly due to the statistical base effect from last year’s comparison.

Tools to combat inflation. Given the predominantly structural nature of Ukrainian inflation, overcoming it should focus on using monetary tools to expand supply rather than restrict demand. The potential of monetary policy should be directed towards developing lending and investment to increase the supply of domestically produced goods and services, which will reduce the risks of structural inflation while also promoting the development of the credit channel of monetary transmission. It is also necessary to optimize the banking sector’s influence on business to reasonable levels and eliminate unfounded "professional judgments" by banking sector employees.

Institutional factors. The low level of bank lending, rising inflation dynamics, and unfavorable investment activity in the economy are closely interconnected processes. Gross fixed capital formation (GFCF) grew by only 3.5% in 2024 and showed low growth rates in 2025. In the first quarter of 2025, loans from Ukrainian banks accounted for only 4% of the sources of capital investment financing.

Two-thirds of total investments in the economy come from public investments, which are actively supported by international partners; without their involvement, investment activity dynamics in Ukraine would be even worse.

Progressive inflation and weak investment activity reflect the unfavorable investment climate in the country. During the martial law period, restrictions were imposed on foreign investors, and the risk of sanctions against Ukrainian entrepreneurs is increasing. This forces a more cautious assessment of risks in any actions. As a result, direct foreign investments without reinvestment of earnings amounted to $402 million in January–April 2025, compared to $910 million in the same period in 2024.

Sanctions and nationalization of assets of various origins are now being supplemented by sanctions against the assets of certain Ukrainian citizens. Although the scale of such sanctions is still limited, they send a negative signal to the entire large business sector both inside the country and abroad. This undermines one of the foundations of a market economy — the inviolability of property rights to income and assets within lawful economic activity.

Violations of property rights have become one of the significant reasons for the deterioration of the business climate in the country, the rise of inflation expectations, and more. In turn, rising inflation, weak investment activity, and an unfavorable business climate have slowed the growth rates of GDP and industrial production in Ukraine.

Exclusively for Espreso

About the author. Bohdan Danylyshyn, academician of the National Academy of Sciences of Ukraine.

The editorial team does not always share the opinions expressed by blog or column authors.