CONSUMER PRICE INFLATION PICKS UP STEAM IN UKRAINE.

Recently released data on consumer price inflation in January (Reuters, February 3) show a clear upward trend in price developments in Ukraine over the last several months. While the year-on-year CPI was 19.2 percent last December, it accelerated in January to 19.9 percent and is expected to peak near 24 percent at the end of the first quarter before decelerating later this year. The worse-than-expected performance of inflation was acknowledged by Kyiv, which increased its official forecast for end-2000 inflation from 16 percent to 20 percent.

These developments stand in contrast to the overall positive performance of inflation in 1999. While the average inflation rate in 1999 (22.7 percent) was considerably higher than the 10.6 percent recorded in 1998, the government managed to avoid a burst of inflation following the August 1998 crisis in Russia and the subsequent hryvnya devaluation. With food products accounting for 51 percent of the consumer price basket, changes in food prices had the largest impact on inflation throughout the year. Saturation of the domestic market with food diverted from planned exports sales kept food prices under control in the first quarter of 1999. Close to 90 percent of food products consumed in Ukraine are produced domestically. The heavy reliance on local farmers helped reduce the negative impact of the depreciation of the hryvnya on prices. In the second quarter of 1999, prices of several food products, sugar and grains, in particular, surged because of expectations of a bad harvest in 1999.

Inflation kicked up in the second quarter of 1999 due to increases in petroleum prices. Seasonal declines in food prices stabilized the rate of inflation in the third quarter, but inflation began to surge in the fourth because the Ukrainian central bank relaxed monetary policy so as to improve Kuchma’s prospects for re-election. Monetary policy had been relatively tight prior to the campaign. The NBU reportedly issued an additional 260 million hryvnyas in September alone in order to pay off wage and pension arrears before the election. Year-on-year growth in M2 accelerated from 20.6 percent in March 1999 to some 40 percent between August and October, before slowing slightly in November. Not surprisingly, inflation surged and the exchange rate fell following monetary expansion in the latter part of 1999.

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