Inflation in Ukraine is approaching its five-year high

Photo: Reuters

Price growth continued to speed up in autumn due to a new wave of hryvnia devaluation in August. In July, before the new upswing, the consensus forecast of Capital promised annual inflation in 2014 at the level of 10.3% and by the end of the year – 16.4%. The prior figure has not yet been reached. Average inflation in the first three quarters of the year amounted to 8.8%, as the State Statistics Service reported. However, the second figure has been surpassed.

In September, consumer prices grew 17.5% compared to September 2013 and 16.2% over December 2013. However, this does not mean that Ukrainian consumers have experienced all the rises in prices planned for this year and that they will not continue to rise.
Conversely, the effect of national currency devaluation and the increase in the cost of housing utility services has not reached its apogee. Under the revised consensus forecast, average annual inflation will reach 11.2% and by the end of the year 19.5%. In this case, the rise in consumer prices in 2014 will be the highest over the past five years.

At the new rate

A new wave of hryvnia devaluation, which dropped from the beginning of January till the end of September by 69-80% to UAH 14-15/US $1 at the closing of the interbank exchange on September 30, was the main factor accelerating inflation. This pushed up the prices of food and industrial products, says Chief Economist at Dragon Capital Olena Belan. Producers of fuel, transport vehicles, pharmaceutical products and fruits were the first to shift the devaluation of the hryvnia to the wallets of consumers. Fuel prices grew 56% in September compared with September 2013, transport vehicles – 44.6% and pharmaceutical products – 32.2%, fruits – 53.9%. Producers of food products that depend less on imports also gradually, albeit less intensively, transferred the rate difference on prices of their goods. For instance, the prices of fish and fish products increased 25.6%, meat and meat products – 19.1%. Now, all other producers have started to revise their prices. For instance, in August clothing and footwear was cheaper than a year earlier, but already in September their prices were up by 4.5% on average.

In July the tariffs for hot and cold water supply and heating were increased. Ukrainians will feel the impact of the increased tariffs for heating only after the heating season begins, while the increase in tariffs for other housing utility services is already notable. In September, water supply tariffs were raised by 47% on average in annual terms and for sewerage – by 68.8%.

Warm and expensive

Over the next several months, prices will continue to escalate, though not as rapidly as earlier. Hryvnia devaluation will not play such a significant role in this as up until now. “Price adjustment to the new rate will finish by the end of October, provided that the hryvnia does not collapse again,” says Executive Director of CASE Ukraine Dmytro Boyarchuk. He estimates that in Q4 prices will increase on average by 1% per month and not 2-3% as earlier. Products that are directly imported may be the only exceptions as importers plan a rate for future supplies that is higher than the current market rate, thus hedging their risks, believes Head of the Analytical Department at Concorde Capital Oleksandr Parashchiy.

The last price challenge for Ukrainians this year is the hike in tariffs for heating, which has been postponed since May, experts agree. In September, the rates for the supply of hot water and heating were only 6.8% higher than a year ago. However, when the heating season begins on October 15 Ukrainians will have to pay much more for these services. For Kyiv residents, for instance, the tariffs for hot water supply since July 1 increased by 44-55% to UAH 25.1/1 cu m, heating – by 48-58% - to UAH 375.3/ Gcal.