Boyarchuk Dmytro Executive Director at CASE Ukraine center for social and economic research

Inflation Springboard

1 August 2011, 15:41

The margin between the consumer price index (CPI) estimated by the State Statistics Committee and the actual growth in the cost of goods and services in Ukraine is striking. I remember the price of A-95 gasoline increasing by at least 15% at gas stations in January-February 2011, while the Statistics Committee reported an increase of 9.9%. This case was the rule rather than the exception. What is this discrepancy between official statistics and reality all about? The answer lies in the CPI calculation method used by the Statistics Committee. It can easily make the reports look good by showing certain price trends as of the twentieth day of each month, with the subsequent interpretation of these figures as data for the whole month. Still easier is the manipulation of numbers within statistical errors. This adjustment looks insignificant during the span of a month, but has a major effect on the CPI as a whole and on individual items of the consumer basket as a cumulative annual figure. These manipulations could possibly be still in place today but it’s very difficult to make such claim without proper investigation.

Since last year, the price of food has increased faster than that for other consumer basket components. Most Ukrainians find this phenomenon, which economic analysts call agflation, very painful. Such a trend has both completely objective grounds, such as increasing food prices on global markets, and specific local features. Last year, for instance, as food prices grew over summer and autumn, government representatives claimed this was a result of a certain conspiracy and speculation by producers, processors and suppliers, etc. However, it is doubtful whether everything can be blamed on speculation because the foodstuff market is quite competitive and prices would have plummeted considerably if supply had exceeded demand. Personally, I tend to link this talk, which is standard for Ukrainian politicians, to their attempts to come up with at least some kind of excuse for their poor economic policy and inability to act in the middle of the global food crisis.

70-80% of the price of food in Ukraine depends on the harvest. In a good year, the price of milk, meat and other foodstuffs remains affordable for consumers. Yet, over these past several consecutive years, as food prices have been climbing globally, Ukraine has also found itself in a difficult situation. For example, in 2011, the cost of agricultural production is quite high, due to the growing price of fuel, mineral fertilizers and extremely expensive financial resources. Entrepreneurs in the agricultural sector assure us that their production costs increased by 60% since last year not only as a result of the growth of global prices for resources and products, but also due to the long-term consequences of the inefficient administrative measures of the government. The 2010 harvest, which was considered to be a bad one, was actually sufficient to meet domestic needs, while exporters could have sold what was left abroad. Yet the government created export monopoly, using administrative methods, to gain excess profits by blocking access to foreign markets. This policy was extremely damaging: the production cost of goods supplied by enterprises of the agricultural complex increased, due to increased risks – producers and grain traders that had been working under a fine-tuned mechanism of commercial lending faced a slew of troubles in 2010 after the government interfered. The essence of the mechanism was quite simple: grain traders concluded foreign agreements and paid farmers an advance of 70% of the price of the grain, thus allowing producers to fund their harvest. In 2010, though, grain traders quit this procedure as a result of the government’s “helping hand,” at which agricultural complex enterprises themselves, were forced to take out expensive loans to harvest the grain.

These and several other factors launched the chain reaction of food price increases in 2010. In addition, new tax rules affected the meat and milk markets. If producers had previously enjoyed VAT privileges,  in 2010, these privileges were replaced by waiting for its reimbursement by the government. In fact, the surge of agflation resulted in the latter taking away 20% of their current assets. This leads to one general conclusion: last year’s damaging government policy in agriculture, had an adverse long-term impact that continues to make the market suffer. Among other things, this was the reason why the expected summer decrease in food prices failed to materialize in 2011 and CASE Ukraine raised inflation expectations to 11% from 10.6%, the rate projected at year-end 2010. Also, we expect utilities to increase in October-November – a consequence of meeting IMF requirements that include raising gas rates for the public. However, the upcoming election campaign is likely to moderate this inflation factor

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