Partnership Approaches in Fighting War-Generated Inflation in Ukraine

on 24.11.2022

Inflation, which soared in Ukraine due to active Russian aggression, is a particular case of the global trend of inflation, caused by prevailing non-monetary factors. In order to cope with, the complementary actions of stakeholders, capable to influence on the inflation drivers, should be provided at the partnership basis. The paper refers to the desired agenda of such actions, and prospective partnership of Ukrainian and European actors.

Unconventional inflation, whose factors are beyond the monetary sphere, becomes the main trend at the global level in last years. Logistics shocks and supply bottlenecks, caused by COVID-19 crisis, followed by the consequences of pro-active monetary and fiscal policies of pandemic period and post-pandemic revival, impact of “hot” war in Ukraine and Putin’s “hybrid” actions at energy markets cause sharp increases of prices through all over the world. The global inflation in 2022 is forecasted at 8,8 % - 4,85 points more, than forecasted at the beginning of the year and 4,1 points more than in 2021.

In Ukraine the direct consequences of the war caused a prevalence of trends of unconventional inflation. Wholesale and retail prices have soared due to more expensive logistics (also taking into account higher prices for fuel), higher prices for imported consumer goods and production components, lost supply segments from occupied or attacked territories, much higher risk premiums, unfavorable inflationary expectations and speculative (rush) consumer behavior for some goods. The high monetization of the budget deficit creates monetary prerequisites for realization of the described factors of inflation, but is not the initial cause of this. The government’s decision to pause the rise of regulated prices for utilities impeded this segment of inflation, but released some money to feed potentially excess consumer demand.

The conventional anti-inflationary policies are incapable to influence the modern inflationary factors. The principal emphasis should be done at the institutional adaptation to the new challenges – in large extent, this requires significant investments in structural changes and infrastructure modernization. Coping with unconventional inflation, different countries tend not to limit with the classical measures of strict monetary policy, supplementing the gradual key interest rates’ increases with strategy-based complementary actions, targeting the adaptive capacity of national economies and mitigating negative social trends.

The National bank of Ukraine (NBU), faced with inflation splash, attempts to continue applying the policy of inflationary targeting (IT) established in previous years. This was evidenced most recently by June decision to sharply increase the discount rate from 10 to 25 %. Since February 24, the role of a powerful antiinflationary anchor has been played by the fixation of the hryvnia’s exchange rate at the pre-war level.

The forced devaluation by 25 % since July 21st influenced as inflationary accelerator. Meanwhile, the strict monetary policy (the NBU declares keeping the discount rate at the level of 25 % until mid-2024 despite forecasted inflation of 9.4 % in 2024) is not consistent with the goal of supporting economic activity in the short run and active investments in recovery and structural changes in the medium and long terms. This impedes the adaptive capacity of stakeholders, thus, deteriorates the prospective to cope with unconventional inflation.

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Distinguished Research Fellow for Ukraine and Eastern Europe Programme


Distinguished Research Fellow for Ukraine and Eastern Europe Programme