CPI slows to 4.6% yoy in 2011, to abate further in 1Q12

Ukraine’s CPI continued to decelerate in December, ending 2011 at 4.6% yoy (down from 5.2% in November), the slowest pace since early 2003, UkrStat reported on Friday. Growth in the prices of food (the largest consumer basket component with a share of 51%) moderated to a mere 0.7% yoy last month, supported by 2011’s abundant harvest. Prices for fuel and transportation services increased the most last year (+21% yoy), followed by utility tariffs (+11% yoy).

Vitaliy Vavryshchuk: The multi-year low CPI figure is one of the few bright spots in the current economic environment. Deceleration in consumer inflation should support household real incomes and bodes well for private domestic consumption. We see a high chance of CPI slowing further in 1Q12 against a high comparison base, but expect the trend to reverse as of April as the positive effects of a 2011 bumper crop wear out. End-December core CPI stood at 6.9% yoy (down from 7.3% yoy in November), well above headline inflation, with the gap clearly indicating weakness in price pressures was mainly due to temporary factors. Assuming a reasonable household gas and heating tariffs increase of 15-20% in 2012, we project inflation at 9.1 by end-2012. We do not believe slowing inflation has any implications for monetary policy – the NBU appears to be sticking to its unspoken policy priority of targeting UAH/USD rate stability and it is unlikely to alter to inject more liquidity into the banking sector as long as downward pressure remains on the hryvnya.