Producers are losing consumers due to galloping inflation

Photo: Reuters

Consumer prices in Ukraine increased in August by 14.2% in annual terms, reported the State Statistics Service. This, however, is not the limit. Back in July, the consensus-forecast of Capital based on the expectations of 11 leading international organizations, research centers, banks and investment companies indicated that inflation would amount to 16.4% based on the results of the year. Now, however, many are revising their forecasts, lowering them up to 20%.

The August devaluation of the national currency made its adjustments to the expert calculations. Up until now, the postponed effect from the increase in tariffs for housing utility services contributed to the expectations of further price growth in the remaining months of the year. However, the hike in tariffs for heating by 40% in July was not reflected in the summer statistics due to the shifted schedule of payment for these services by the population. This will be taken into account in the inflation indicators when the heating season starts. Meanwhile, this was already taken into account by economists in their forecast of 16.4%.

Head of the Analytical Department at SP Advisors Vitaliy Vavryshchuk says the prices have not fully reflected the depth of the currency devaluation in August (only prices of transport vehicles, fuel, medications and certain food products increased proportionally). After the August devaluation of the hryvnia by 14% to UAH 13.80-13.95/USD at the moment of closing of the interbank exchange on August 28, which caused devaluation to 67% since the start of the year, prices began to soar even faster.

“We are preparing to adjust our August forecast of inflation by the year’s end from 17% to 18-19%,” says Senior Analyst at the International Center for Policy Studies Oleksandr Zholud. That is, however, on condition that the hryvnia will stop sliding and by the year’s end stabilize at the level of no less than UAH 13.50/USD. In the report based on the first review of Ukraine’s performance under an economic program supported by a Stand-By Arrangement (SBA), experts of the IMF forecast inflation of 19% at the rate of UAH 12.50/USD in December. This coincides with the government’s expectations. Finance Minister Oleksandr Shlapak believes inflation in 2014 will speed up to 19-20%, while the rate of the hryvnia will return to UAH 12.50/USD.

The rise in prices in August simultaneously with the cessation of a rise in incomes and an increase in expenses for housing utility services undermined the purchasing power of people. According to a survey conducted by GfK Ukraine, in July the fears of unemployment increased among Ukrainians. The index of expected unemployment dynamics amounted to 147.9 points on a 200-point scale. A year ago, Ukrainians feared unemployment much less – in July 2013, the index was 136.2 points.

Also, the expectations of inflation and devaluation of the national currency increased (185.9 and 125.7 points respectively). Due to this, the index of expected changes of personal well-being decreased (63.5 against 96.2 points a year ago) as did the index of the advisability of major purchases (62.1 against 88.0 points), explain experts of the company.

Based on the results of August, the moods of Ukrainians could become even more pessimistic. Judging by the August survey of the same company, 88% of Ukrainians say the conditions of the domestic economy are grim, which on the background of high uncertainty about the future of the country does not contribute much to active shopping.

On the one hand, this has a favorable impact on the economy through a decrease in imports. Over seven months, the import of goods dropped 19.5%. According to IMF estimates, this figure will decrease 21.4% by the year’s end. On the other hand, the decrease in demand also inflicts damage on the economy and undermines the sales of goods manufactured by domestic producers.

Overall, in January-July, the retail turnover, in which the ratio of domestic and imported goods is 60% to 40%, according to Zholud, decreased by 1%, although in the same months of the previous year it increased by 10.4%. Based on the results of the year, its decline will reach 8%, which will be even higher the overall decline of the economy, the economist calculated.