Not only electricity: prices in Ukraine will rise

Inflation in Ukraine, a country that is at full-scale war with the Russian aggressor, is at a fairly low level this year: as of April it was 3.2%, which is even lower than in the United States, the world's number one economy.

However, price growth may soon accelerate, and the acceleration seems to have been started by the recent increase in electricity tariffs.

Dear dollar will increase prices

In Ukraine, from June 1, the electricity tariff for the population has increased significantly. In addition to the fact that Ukrainians will have to pay one and a half times more for electricity than before, an increase in energy tariffs will cause an increase in other prices. As we wrote earlier, in particular, tariffs for servicing apartment buildings should increase, as well as transportation costs, which businesses will pass on to consumers by raising their prices.

But electricity tariffs are far from the only thing that will cause prices to rise in Ukraine in the near future.

Thus, since the middle of last month, the dollar exchange rate has been growing significantly, which crossed the 40 hryvnia mark on May 21, and 41 hryvnia in early June. In recent days, stabilization has been observed in the foreign exchange market, but the gradual devaluation of the hryvnia is likely to continue.

According to the founder of the Univer investment group, Taras Kozak, the currency that enters the country is converted into hryvnia at a rather low rate, as a result of which the budget does not receive significant amounts of funds.

“The Ministry of Finance receives significantly less from this currency than it could have received if there had been a gradual devaluation, and the rate would not have been 38, as it was for quite a long time, but 42 - that is, there would be 10% more income from this currency. This is a significant volume,” the expert explained in a commentary.

He recalled that in the 2024 budget, the average annual dollar exchange rate is set at 40.7 hryvnia, and at the end of the year - 42 hryvnia (42.1 hryvnia - “Apostrophe”). “For the average annual rate to be 40.7, over the summer you need to reach 42, and then it will be at this level, plus or minus. Thus, we have that the National Bank smoothly carried out a sharp devaluation,” Kozak said.

It is obvious that an increase in the exchange rate will lead to an increase in prices, first of all, for imports, which, according to the expert, in the consumer basket of Ukrainians today ranges from 30% to 50%, depending on family income. “A devaluation of approximately 10% will give several percent inflation - 3-5% we will see additional inflation due to devaluation,” he explained.

If gasoline prices go up, everything will go up in price.

The exchange rate is one of the key factors in changing the cost of automobile fuel. Accordingly, if the dollar (as well as the euro) continues to rise in price, prices for fuel, which today is almost 100% imported, will inevitably begin to rise.

True, another factor influencing the price of gasoline and other fuels is world oil prices, and they have been declining recently (although it is now very difficult to predict the further dynamics of their changes).

However, automobile fuel in Ukraine will rise in price in any case, since excise taxes on it will be raised from July 1. According to the bill, which the Verkhovna Rada recently voted for, the excise tax on gasoline should increase from 213.5 euros to 242.6 euros per 1000 liters, on diesel fuel - from 139.5 euros to 177.6 euros per 1000 liters, on liquefied automobile gas – from 52 euros to 68 euros per 1000 liters.

According to experts with whom Apostrophe spoke, as a result of this increase alone (and excise taxes will rise for five years), retail prices for gasoline and diesel will increase on average from 1 to 2 hryvnia per liter.

Well, a rise in fuel prices traditionally leads to an increase in prices for virtually everything, since businesses factor in their transportation costs.

The harvest is not encouraging

This year, price increases have so far been quite moderate. As of April (there are no data for May yet), inflation since the beginning of the year was 1.4%, for the year - 3.2%.

It is noteworthy that “food” inflation from the beginning of the year amounted to only 1%, and in annual terms – by April 2023 – it turned out to be generally negative (-0.8%).

At the same time, many products have steadily risen in price, in particular bread (by 5.7% over the year), cheese (7.8%), milk (9.3%) and especially butter (14.9%).

And this, it seems, is not the limit. Thus, the National Bank of Ukraine predicts that inflation will accelerate in the coming months due to “the exhaustion of the effects of large harvests of the previous year and warm weather this year, an increase in business expenses for labor costs and an increase in the administrative component of inflation.”

As for the harvest, this year it will indeed be significantly worse than last, says Oleg Pendzin, executive director of the Economic Discussion Club: “If last year we collected 83 million tons, then this year it is projected to collect at the level of 75-76 million tons maximum. Of these, less than 50 million tons are grains.”

According to him, because of this, for example, bread prices will rise by 5-7%.

Poles and VAT

Another factor in the upcoming rise in prices is the unblocking of the border with Poland, which occurred at the end of April. According to Oleg Pendzin, many food products that are traditionally exported to Europe remained in the country due to the blockade; their supply exceeded demand, causing their prices to fall. We are talking, in particular, about such goods as sugar, sunflower oil, flour, and cereals. Now that the blockade has been lifted, exports should recover in full and prices of such goods should go up.

However, Polish farmers are again rallying at the border, blocking one or another checkpoint, and therefore Ukrainian exports may again be under the threat of a blockade, at least partially.

And, of course, let's not forget about the authorities' plans to increase the value added tax (VAT). If now it is 20%, then soon it may increase by 2% or even 3%. VAT is included in the prices of absolutely all goods and services that we buy and pay for. That is, practically everything will become more expensive.

“VAT is a net increase in inflation, since producers tend to pass it on to consumers,” says Taras Kozak. “If VAT increases by 2-3%, then this will be about 2% additional inflation.”

By the way, according to the expert, the increase in electricity tariffs will add 1-2% to the overall inflation this year.

Thus, the price increase for this year may well be about 10%. A more optimistic scenario is 8%.

“This is very low inflation for a war, but significantly higher than the target of 5%,” summed up Taras Kozak.