National Bank of Ukraine Comments on the March 2016 Inflation Figures
OREANDA-NEWS. The data released by the State Statistics Service of Ukraine suggest that in March 2016, annual headline inflation moderated to 20.9% y-o-y, down from 32.7% in the previous month. In monthly terms, inflation increased by 1.0%.
March's inflation figures were in line with NBU expectations.
However, the main components of annual and monthly inflation deviated from our inflation projections.
In particular, March's core inflation increased by 1.9% m-o-m, outperforming the NBU’s current forecast. The increase in core inflation was driven by higher prices for clothes and footwear. In March 2016, prices for clothes and footwear picked up by 10.7% m-o-m due to the arrival of new collections.
Instead, the decline in raw food prices (by 1.4% m-o-m) was steeper than expected. As anticipated, prices for “borshch vegetables” (including prices for potatoes, onions, cabbage, carrots and beetroots), eggs, meat and meat products fell. At the same time, there was a steeper-than-expected decline in prices for bananas and tomatoes.
Administered prices and tariffs increased by 2.1% m-o-m, which was broadly in line with our projections. The increase in administered prices and tariffs was driven by a 25.2% rise in electricity prices for households (scheduled price adjustments effective from 1 March 2016) and higher excise taxes on alcoholic beverages. As expected, there was a pick-up in prices for tobacco products reflecting signs of price wars unleashed by some producers coming to an end. At the same time, as expected, domestic fuel prices rose 1.6% m-o-m, reflecting a recovery in global oil prices observed since the second half of February.
Overall, headline inflation rose 1.6% q-o-q, underperforming the NBU’s inflation forecast of 4% published in the January's Inflation Report.
The deviation from the projected inflation path can be mainly attributed to the increased supply of raw foods, reflecting the narrowing of export opportunities for domestic exporters due to trade curbs imposed by the Russian Federation, including a ban on the transit of Ukrainian goods through its territory, as well as an embargo on imports of Ukrainian eggs imposed by Israel and Middle Eastern countries. Furthermore, the supply of some imported fruit and vegetables increased, reflecting redirection of their supplies from the Republic of Belarus and Turkey. As a result, raw food prices rose by only 0.2% q-o-q, underperforming price growth projections of 7.6%.
The price wars unleashed tobacco product producers led to a more moderate growth of administered prices and tariffs (by 2.1%), compared to our forecast of 3.3%.
At the same, core inflation increased by 2.3% q-o-q, dragging the YoY reading down to 15.0%, which was in line with NBU projections.
There is a high likelihood that the full year headline inflation for 2016 will underperform the NBU's inflation projections, envisaging moderation of headline annual inflation to 12% However, most factors causing inflation to deviate from the projected path are short-lived, with a high likelihood that their impact might reverse the direction over the next quarters.