According to data produced by the State Committee of Statistics, the consumer price index dropped by 0.4 percent, including prices for food — 0.4 percent, and services and tariffs — 0.8 percent. Prices for nonfood products increased by 0.1 percent. During January-April 2006 the price index was 2.3 percent compared to 5 percent during the first four months of 2005. (In April 2005 prices rose by 0.7 percent.) Deflation observed in the last two months (in March of the current year the price index fell by 0.3 percent) is producing ambiguous estimates. “This is the lull before the storm,” say IMF specialists, who correctly point to the fact that an “absence of inflation is evidence of an unstable economic situation in the country.” The paradox of such a situation is that with a low GDP growth rate (2.4 percent over three months) nominal incomes of the population are rising even faster than in 2005. In comparison with the same period last year it increased by 35.1 percent and wages, by 39.9 percent.
What caused the deflation process in March and April? The situation can be explained by the relative saturation of the food market owing to a growth of import capacity (in January-March 2006 imports increased by 32.0 percent), and the rather stable functioning of the food industry whose production increased by 6.5 percent in the last four months. Last year’s sharp increase in food prices (dairy products and meat), which reached world (European) standards, must also be taken into consideration.
Price dynamics were also dramatically influenced by the implementation this year of a harsh monetary policy by the National Ukrainian Bank (NBU). Whereas last year the money base reached 17.1 percent, this year it dropped by 5.7 percent. A positive influence on price dynamics is protected by the stability of the hryvnia exchange rate, although this is mostly explained by the drastic weakening of the external dollar positions observed in recent days.
Analyses also point to positive processes taking place in the structure of spending. Consumers spent 20% more on goods and services than in the same period last year, whereas their incomes increased by 35.1 percent. The NBU’s statistics point to an increase in the volume of bank deposits among the population, although compared to last year, their growth rates were greatly reduced. Over four months they increased only by 9.5 percent.
Between January and April a stabilizing role on general price dynamics was also played by the artificial retention of the value of services and tariffs during the pre-election period, as well as by the stability of gas prices.
At the same time the forecast for price dynamics evaluation remains pessimistic. IMF specialists are proceeding from the fact that in 2006 prices will grow up by 11-13 percent. Their position is shared by most domestic experts, including the author of this article. The declared price growth for almost all public utilities and other services is giving rise to expectations that the deflation constituent of price dynamics typical of the summer period will be greatly weakened this year.
In fact, an increase in energy resource prices is a result of Russia’s intention to boost export oil taxes in June 2006. An increase in the deficit of the balance of payment, which was recorded at $0.7 billion during the first quarter of this year for the first time since 1998, will also negatively influence the hryvnia exchange position and inflation processes.
According to the Ministry of Economy’s prognosis, the negative balance of the goods and services market in 2006 will reach $3 billion. This may cause the hryvnia to destabilize, especially in the fall-winter period. The destructive tendency of accelerating the price dynamic of industrial producers may also stimulate a rise in consumer prices (February — 0.3 percent; March — 0.4 percent; April — 1.4 percent).
In view of this, the recently declared position of the Ministry of Economy to retain the inflation prognosis for 2006 (at 11.4 percent) is noteworthy. Under these conditions, a possible collision is maintained, in which the drawing account parameters of inflation presented in the state budget this year and the expected (prognosticated) inflation rate also differ dramatically.
