OREANDA-NEWS. The further spike in consumer prices in October has driven yoy CPI rate to 14,8% - the levels not seen in Ukraine since 2000, reported the press-centre of Raiffeisen Bank Aval.

High food prices inflation this year is not Ukraine-specific phenomena - bread, meat and diary products’ prices are going up all over the world due to poor harvest. However, the level of inflation in Ukraine is much higher than for example in Eastern European countries indicating that there other factors driving inflation up in Ukraine.

One of such factors is expansionary fiscal policy. Starting from 2004, electoral cycle in Ukraine is just over a year, and the politicians are using social expenditures as a main instrument in elections’ campaigns. As a result, due to massive burst in social spending in recent years real wages in the economy are growing much faster than labor productivity thus putting an upward pressure on prices.

Another reason for high inflation in Ukraine is loose monetary policy - following the path of other transition economies, Ukraine is facing persistent appreciation pressure in recent years. But, unlike other countries, Ukraine continues to maintain fixed exchange rate, thus the inflow of foreign currency is resulting in high growth of money supply. For example, this year base money (M0) and broad money (M3) grew almost by 50% in yoy terms. Part of this money supply growth is matched by increasing demand for money - in transition economies, as the economy is growing; people are increasing their demand for money. But current money growth rate looks uncontrollable and for sure has some effect on inflation this year.

Besides, recent spikes in food prices have revealed that the government in Ukraine is lacking clear and transparent mechanism of government interventions in food markets, such as state reserve funds for certain food products. Instead, the government is resorting to administrative measures, such as setting price ceilings and profit caps, prohibiting exports etc.

Recent inflation spike represents the main risk for macroeconomic stability in Ukraine at the moment. High inflation erodes household incomes - people became poorer in real terms that increase social tensions in the society. Also, with rapid expansion of retail lending in recent years the fall in household real income may negatively affect the ability of private individuals to service their loans, thus increasing credit risks for the banking sector. Moreover, rising inflation pushes lending interest rates upwards, which reduces access to credit and, in turn, negatively affects both investment and household consumption. As a result, economic growth might slow down.

Besides, if inflation is accelerating and becoming more volatile, inflationary expectations are deteriorating that may lead to consumer rush and undermine the confidence in national currency. Finally, high and volatile inflation is harming business planning by entrepreneurs, thus hampering investment into the economy.

Therefore, fighting inflation should be the top priority for Ukrainian policymakers at the moment. In this sense, recent inflation hike might play a positive role urging authorities to implement long-standing reforms. First of all it concerns the introduction of inflation targeting framework when low and stable inflation is the main policy objective. Second, the government should focus not only on the demand side of the economy by increasing budget expenditures, but pay attention to the supply side as well - reform labor market, simplify taxation, reduce regulatory burden on business. In more short-term the government should envisage conservative and balanced social policy in forthcoming 2008 budget. All these measures require the improvement in policy coordination between different state institutions and reducing political pressure on the economy.