February 12, 2018 | Cbonds
|CPI inflation reading for January came out at +1.5% m/m and +14.1% y/y. We have expected fairly elevated reading in the start of the year due to fiscal expansion, seasonal devaluation of hryvnia, weaker USD and spill-off impact from energy prices. At the same time producers’ prices surprised on the upside, jumping by +4.4% in one month (+22% y/y growth). We review our 2018 CPI expectation to 10.9% (year-end) and now see that risks are skewed towards further tightening during the next MPC meeting on March 1st.|
Food items displayed worse-than-average performance (+2.0 m/m, +17.9% y/y), with broad and strong acceleration in prices of bread, meat, fruits and vegetables. The only stable items in the basket seem to be those which already showed aggressive growth last year. This leads us to conclusion that demand drivers are already fully in play against backdrop of loose and procyclical fiscal policy.
Transportation items were up by +3.0% m/m (+17.1% y/y). This goes in line with the recent increase in energy prices, and we expect similar aggressive acceleration in February.
Core inflation continued to decelerate on m/m basis, to +0.7% m/m, but remains fairly elevated in y/y terms at +9.8%. We noted increased divergence between base inflation and wider CPI index in the last several months.
The main message to read is producers prices and this message is worrisome. PPI was on decelerating path since April 2017, before re-accelerating sharply in January 2018 (from +16.5% y/y to 22.0% y/y). This sharp acceleration was led by domestic prices (vs export prices) and may point to a quickly closing output gap in the economy, with the labor market being particularly tight for quite some time. We have long argued that ongoing NBU tightening (+350 b.p.) to some extent may contribute to increased financial costs that creates ground for higher PPI levels.
Following open publication of MPC minutes, which displayed very hawkish stance of MPC committee, we believe it is likely that the regulator continues to hike, unless we see a sudden favorable inflation expectations change. We welcome recent steps of NBU aimed at bringing more transparency to decision making in monetary policy.
|Full company name||Ukraine|
|Country of risk||Ukraine|