Ukraine, economics: wage dynamics and inflation, Nov 2021

Cost-push inflation could undercut the domestic recovery

(for the EIU)

In September, the average nominal monthly wage rose to HRN14,239 (about US$535), according to the State Statistical Service, up by one-fifth on a year earlier. In the same month, the pace of real wage growth slowed to 6.8% year on year.

In 2021, rapid real wage growth has been a key factor driving the domestic recovery from last year’s steep economic contraction, when Ukraine’s real GDP fell by 4%, driven by the impact of the Covid pandemic. However, the pace of growth of the real wage has been slowing since May, with the fortunes of the domestic retail sector following in step. By September, retail turnover, for example, had slowed modestly, to a cumulative 12.2% compared with the first nine months of 2020, from around 14% at the end of the first half.

While some labour market developments are likely constrain the recovery of household spending—including a rise in the unemployment rate, and in the stock of unpaid wages—a more immediate threat to the domestic recovery has been a marked rise inflation, undercutting households’ purchasing power.

In particular, the worldwide surge in inflation, linked in part to supply bottlenecks in Europe and Asia, has driven up prices globally for industrial inputs and energy, both key imports for Ukraine. This has triggered a surge in the producer price index (PPI) in Ukraine, which shot up further in October, by 12.5% compared with September, taking the year-on-year rate to 57.2%, its highest since the general macro-economic crisis of 2014-15.

Although the increase in consumer prices was more muted—rising by 0.9% month on month in October, but slowing slightly year on year, to 10.9% compared with September—the National Bank of Ukraine (NBU, the central bank), whose remit is to control inflation, will be concerned about the impact of second-round effects, and especially the prospect of inflationary expectations becoming ingrained.

The continued surge in manufacturing costs is a key factor that could threaten the role of the Ukrainian consumer sector as the driver of a broader economic recovery in 2022, whether by way of the feed through of cost increases from firms to consumers, or by inducing a sharper than expected tightening of monetary policy by the NBU, which could weigh on banks’ private credit growth.

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