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In 2021, inflation was 10% yoy, in particular, food prices rose by 13.3%. However, subjective observations suggest a much higher rate. This is not surprising, because any observer “fixes” primarily those prices that change rapidly, but “does not notice” those prices whose dynamics are moderate.

Everything has risen in price

According to the State Statistics Service, during 2021 bread prices rose by 18.7%, eggs – by 19%, sunflower oil – by 38.8%, sugar – 28.3%, etc. Everyone noticed it. But the fact that fruit had fallen by 10.2% at the end of the year was noticed only by those who are interested in statistics. As a result, we have “the average figure” which does not always match the subjective perception of price dynamics.

The share of food in the structure of the consumer price index is over 40%. It is quite simple: a 1% increase in food prices raises the overall inflation rate by 0.4 percentage points. Accordingly, a 20% increase in food prices will raise inflation by 8 percentage points.

Hard time

In 2021, higher food prices were caused by the rapid rise in world food prices: for the year the FAO food price index increased by 23%, from May 2020 (local minimum) – by 47%. However, the influence of this factor has already been largely realized. In 2022, the biggest intrigue is how devastating the factor of extremely high gas prices will be for the economy. Not all business costs can be shifted to the consumer. Obviously, some businesses will have to close down, which will have a corresponding effect on GDP dynamics.

How will the increase in gas prices affect crop yields (because of higher prices for mineral fertilizers)? What will be the gas tariffs for the population after the end of the annual tariff? Without answers to these fundamental questions, any inflation forecast for 2022 would be, to put it mildly, unreasonable.

The main pro-inflation risks are of costs nature. Despite numerous messages of the National Bank of Ukraine about the stable consumer demand, it is the factor of limited demand that may play a key anti-inflationary role in 2022. But this same factor will restrict the economic growth potential.

There is no reason to panic

The devaluation surge in January is a typical phenomenon associated with the resumption of business activity after the New Year holidays. However, in January 2022, the effect of “seasonal” factors was fueled by deteriorating external circumstances.

Significant devaluation pressure on the currencies of developing countries is driven by the expected tightening of monetary policy of the US Federal Reserve in response to the rapid acceleration of inflation. Besides, we have a negative information background related to the aggressive actions of the Russian Federation, which stimulates the demand for foreign currency, in particular by foreign investors.

There is also a speculative component. From December 1, the NBU increased the limits of banks’ FX position by one and a half times – from 10% to 15% of regulatory capital. The National Bank of Ukraine believes that “this will contribute to the banks’ greater role in smoothing out excessive exchange rate fluctuations in the foreign exchange market”. However, it is easy to guess that not all banks are interested in such “smoothing”. For some of them, the opportunity to earn on exchange rate fluctuations may seem quite attractive. The NBU should take care of smoothing the fluctuations, thus reducing the attractiveness of arbitration.

• First, despite the significant depreciation of the hryvnia since the second half of November, the exchange rate as of January 18, 2022 (28.12 hryvnia to USD) is slightly higher than on the same date in 2021 (28.05 hryvnia to USD). That is, at the moment there is no reason to talk about anything more than FX market fluctuations.

• Secondly, given the current exchange rate policy of the NBU with the so-called seasonal fluctuations of the exchange rate, the devaluation of the hryvnia in December-January is the rule rather than the exception. Negative information background associated with the aggressive policy of the Russian Federation should be added to the traditional factors (in particular, significant payments from the budget at the end of the year).

If we talk about more important factors of devaluation, the main one is currently the high cost of energy imports. We can feel the impact of this factor on the course in the future.

Vitalii Lomakovych, Founder and Chairperson of the Growford Institute for Channel 24.