Two-digit inflation growth anticipated

The inflation rate is one of today’s puzzles that may influence tomorrow’s alignment of political forces. The latest statistics point to 0.9 percent in October and nearly 8.1 percent in the first 10 months of this year. Some experts predict that the actual percentage is considerably higher. The engine of inflation today is services and energy resources (although gasoline prices have even dropped somewhat) that are programmed for further price increases.

Can one trust the State Statistics Committee under the circumstances? According to Professor Oleksiy Plotnykov of the Institute of World Economy and International Relations, even if the committee is somewhat improving the indices, it is doing so within permissible limits.

There are still two months to the end of the year and the situation may change. Minister of the Economy Arsen Yatseniuk predicts that inflation will reach 11 percent, yet experts often mention 15 and even 20 percent. Time will show whose forecast is more accurate. However, the minister’s advisor, Serhiy Yaremenko, notes that the inflation process has not received an impetus in the past several months and that there are no preconditions for inflation growth.

Well, there isn’t much longer to wait. It seems that the “fans” of the inflation process in the expert community are not doing this for sport but because they want to spur the government into adopting real measures so as to prevent dissatisfaction with its policy. Plotnykov says that growing energy prices are one of the main factors of inflation. He says that there is little the government can do about this, since fuel prices are increasing all over the world. His view is echoed by Viktor Skarshevsky, the deputy chairman of the National Security and Defense Council. He believes that gas and oil prices will be even higher next year and that this will influence the inflation level. But Skarshevsky urges not to give way to despair and points out that the increase in energy prices may force our production to become more energy-saving.

In this sense the Kryvorizhstal proceeds would come in handy, yet most experts sadly predict that all this money will be used to patch up the budget holes or will be spent on food. Plotnykov notes that this money will be spent on pensions for parliamentarians or other “important” social payments, instead of raising the “next generations’ fund” or re-equipping production. This is also a factor that will cause inflation growth, except that in this case the government will have to assume full responsibility.

The expert community is adamant: all the money cannot be spent as social disbursements; the future will not forgive this. Yaremenko says that, even if the government uses part of the privatization proceeds to patch up budget holes, the remainder will be enough to launch some development programs. If all this money is spent on food, he is convinced that, given such inflation growth and economic growth decline, we will find ourselves on the verge of a global crisis, all the more so as next year’s inflation will also be considerable.

Interestingly enough, few critics believe that the government will succeed in containing the inflation process. Plotnykov says that the tools being used by Yekhanurov’s cabinet hardly differ from Tymoshenko’s; therefore food crises and other problems may reoccur and in view of the approaching elections, which always cause a degree of instability in the economy, there are increasingly fewer reasons for optimism. Natalia Reznykova, an economics specialist at the Institute of World Economy and International Relations, believes that this uncertainty in society may lead to a disbalancing of the banking system. Tired of the government’s hustle and bustle, people will decide that it’s better to keep their money stashed away rather than in bank accounts, and they will rush to empty their accounts and not risk taking out loans. All this may result in devaluation, which in turn will cause market inflation.

Speaking of devaluation, at one time the National Bank of Ukraine decided to do the opposite, revaluate the hryvnia, in an attempt to counteract inflation. Yaremenko, the former number-two man at the NBU, still disagrees with this approach, saying that in a transition economy such as we have in Ukraine the national currency exchange is the only price anchor. Here any fluctuations automatically cause price jumps. After the revaluation of the hryvnia people started converting financial assets into tangible ones. This sent the market into a stir and prices went up. However, revaluation may not have been the only reason, although it is hard to disagree with the assumption that the government’s declarations about salary increases led to a price jump that cannot be compensated by the obtained increase.

It follows from this that practically all the real measures adopted by our government, such as the regulation of the rate of exchange, declarations about payments, and others, only foster inflation. Yet their intentions, which remain only that, could not only lower inflation but prevent future inflation increases. According to Bohdan Adamovych, the director of X-Trade Ukraine, the more freedom a country has and the more this freedom is involved in the world economy, the stronger the economy and the lower the inflation rate. Foreign investments, if they existed, would neutralize even emerging trade misbalances. The government promised us all this.

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The International Monetary Fund predicts that this year inflation in Ukraine will reach 12 percent (December to December) or 13.7 percent (annual average). The IMF recommends that the Ukrainian government counteract inflation and growing budget payments more actively, reinforce its monetary and credit policy, and continue adjustment reforms. According to the IMF, in order to prevent an inflation surge, 4.8 billion dollars, part of the Kryvorizhstal proceeds, should be channeled into payments to cover the state debt.