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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

Six-Month Inflation “Reserve” Exhausted

17 May, 2005 - 00:00

So far the government’s attempts to curb inflation have produced only modest results: in the past four months it has reached 5.1%, an appalling figure if you take into account the official forecast of an annual 9.8%. Should the current rate persist, prices may shoot up by 15.3% by the end of the year, something we haven’t seen for a long time. If we look at the April index alone (0.7%), it does not seem to be a big one, but even if this not-so-high rate continues until year’s end, we will reach 10.3%. This is also too much. Most households in this country, with a per capita budget of 100 dollars at most, will have to tighten their belts, although the government talks about wage and pension hikes almost on a daily basis. In practice this means that one hand is giving the ordinary Ukrainian something that the other hand is immediately taking away.

Optimists close to the Cabinet and the National Bank have their own scenario of further developments. They foresee zero inflation or even deflation in the summer and early autumn, following a seasonal price drop in prices for eggs and vegetables. In their view, this forecast will hold good for late fall if there is a good harvest.

Unfortunately, the price situation will depend not only and not so much on the government’s words (although this is also an important factor) as on its deeds. Here things are not quite so rosy.

It should be recalled that we were recently reassured that Ukraine would not turn into a country of vegetarians. But let’s look at the prices in the grocery store nearest the editorial office, which is mostly patronized by ordinary people who live a long way from supermarkets. Frankfurters cost UAH 20.20/kg and cooked sausage from UAH 26.90/kg to 29.90/kg, depending on the variety. These prices cater to the so-called children’s and pensioners’ sector. And here is the middle-class sector: cold beef is UAH 36.50/kg, cold boiled pork from UAH 42 to UAH 56/kg. What is more, the rather surprised salesclerk told The Day’s correspondent that the price of sausages had even dropped (by about one hryvnia) over the past few days.

Is this the result of the government’s anti-inflationary measures? Yes, to some extent. A farmer friend of mine said he was fed up with the local authorities’ demands to sell meat at a low, by no means market-oriented, price. “If they continue doing this, I will, of course, sell meat — to neighboring farmers, not the administration,” he says, “and let them either sell it at a market price or eat it up!” But not everyone can stand up to the bosses. Experts note, however, that administrative pressure can only succeed in the short term, i.e., today, tomorrow, for a month. Then come shortages and skyrocketing prices.

As for price-reducing market instruments, they have admittedly failed. Cabinet failed to negotiate cutting the meat import duty with parliament. Meat auctions were also deflated. Bidders for the meat tender held by the State Committee for Material Reserves on May 11 withdrew their bids because the starting price of meat was too low and, hence, unacceptable. Things did not improve even when the committee raised the starting price to a thousand hryvnias per ton.

Neither does the Standard & Poor’s agency share the government’s optimism. It predicts that consumer prices will rise by an average of 13% in 2005.

Meanwhile, Ukraine’s first vice-premier Anatoly Kinakh says that the current inflation rate is dangerous for the country, and it is necessary to adopt a series of measures to curb this process. “We are really worried about rising inflation: consumer price inflation ran at 5.1% in four months, which means that the six-month inflation reserve specified in our basic financial documents for 2005, including the state budget, has been exhausted,” Mr. Kinakh said.

Last Friday changes were reported to the Ministry of Economics’ instruction “On Setting Wholesale and Transfer Price Limits for Diesel Fuel and Gasoline.” According to this document, retail prices should be UAH 2.99/liter for diesel fuel, UAH 3.20 for the A-95 gasoline, UAH 2.99 for the A-92 gasoline, and UAH 2.85 for the A-76 brand.

Optimists maintain, however, that oil products account for a mere 0.6% of the inflation basket. In their opinion, it is crucial not to allow oil-related inflation to affect meat. That would be really bad (in which case optimists agree with their opponents).

By Vitaliy KNIAZHANSKY, The Day