Mobilization, migration abroad restrains Ukraine inflation rate in July 

Consumer prices in July 2023 decreased by 0.6% compared to June this year. Over the current year, consumer price growth slowed from 12.8% to 11.3%. This was driven by a seasonal decline in prices for vegetables (-18.2% month-on-month), fruit (-1.3%) and eggs (-7.6%). The Core Consumer Price Index in July was unchanged from June (0.0%).

This year's actual inflation rate is significantly lower than last year's forecasts of the government, the National Bank of Ukraine (NBU), and international organizations. The NBU's updated forecast envisages inflation slowing to 10.6% in 2023 and 8.5% and 6.0% in 2024-2025.

“The main restraint on inflation is a decline in aggregate demand, including due to a large number of people moving abroad and men being drafted into the Armed Forces of Ukraine”

Another factor restraining consumer price growth is the government's partial moratorium on raising housing and utility tariffs. However, this factor should only be seen as a delay in price growth, as the market will adjust these administrative tariffs in the future. The NBU's tight monetary policy partly contributed to the price restraint. The increase in the key interest rate resulted in a redirection of part of the money supply from consumption to savings.

At the same time, the state budget deficit remains a significant pro-inflationary factor. Between January and June, the fiscal deficit (excluding grants) amounted to UAH 746 billion (an increase of UAH 180 billion in June). In June, the deficit relative to the needs of the State Budget Office for expenditures and debt repayments was 42%. This is significantly higher than in the previous 3 months (with an average level of 28%) and roughly in line with the average level for 2022 (44%).

At the same time, as the exchange rate regime remains fixed, its impact on inflation is currently stabilizing. However, fixing the exchange rate in the face of a significant balance of payments deficit requires that foreign exchange reserves be used to support it.

The level of foreign exchange reserves in Ukraine is supported by large-scale external assistance and restrictions on capital outflows from the country. The risk to the hryvnia exchange rate is the growth of the economy's import needs and the decline in the country's export potential.

The future prospects for inflation will be characterized by its dependence on mainly non-monetary factors. These include, first and foremost, military factors that increase production costs (destruction of production facilities and infrastructure, energy problems, and logistical difficulties). In addition, the potential increase in housing and utility tariffs, significant reconstruction needs, the economy's growing import dependence, and a large fiscal deficit will remain significant pro-inflationary factors.

Specially for Espreso.

About the author: Bohdan Danylyshyn, Professor of the Kyiv National Economic University named after Vadym Hetman, former Chairman of the NBU Council.

The editors do not always share the opinions expressed by the blog authors.