CPI turns negative yoy in May

Ukraine’s consumer prices decreased 0.3% mom in May, taking the annual tally to -0.5%, the first deflation observation since early 2003, according to UkrStat. Food was the only consumer basket item that saw a price decline on a year-on-year basis (-4.2%), mainly thanks to drops in the prices of vegetable (-59.3%) and sugar (-35.7%). Almost all non-food items saw price growth, albeit of a moderate magnitude of up to 5.4% yoy. The largest price increase in the basket was transportation services, up 8.9% yoy.

Vitaliy Vavryshchuk:  The May CPI numbers were better than we expected – deflation mom is unusual for May and was mainly driven by a plentiful harvest both this spring season and from last year. We expect CPI will stay negative on a year-on-year basis at least until September, but is likely to turn positive and accelerate to 5-6% by end-2012. Overall, we think deflation is strongly positive for the economy currently as it supports a high rate of growth in household income and bodes well for domestic demand, the only material GDP growth driver this year. We expect more steps from the NBU to soften monetary policy, but do not expect they will give any major impetus for a lending recovery.