The government announced a good harvest this year, which was intended to convince the population of the consistency of prices for agricultural goods and food, and, consequently, of price stability in general, at least during the autumn-winter period. However, the agricultural sector is not only characterised by an increase in harvest. In contrast, there is a reduction in production in livestock (leading to rising prices for meat and dairy products), whilst the harvest itself has only an indirect effect on the cost of food for the population.
Why are prices for food products rapidly increasing and what can the population expect in the near future?
First of all, it is remarkable that the rising cost of food around the world has already become one of the leading trends in the coronavirus period. Moreover, the growth of demand for such products is likely to continue. This will provoke an increase in prices in international markets, which will be followed by domestic prices (even while having a good harvest).
Even more important is the fact that the energy component stands out among the most important components of the rise in prices for the products of processing industries. There has already been an increase in transportation tariffs, and soon the population will face new housing and communal payments, which will provoke higher prices for agricultural products not only in the retail network, but also for home-grown fruits and vegetables sold by “babusi” (they also need to protect themselves from the tariff wave).
Moreover, the increase in the cost of energy resources leads not only to the current increase in production costs, which must be offset by consumers, but also to the formation of negative medium-term price expectations. Of course, future rising costs are based on today's inflated prices. Therefore, rising food prices will mean a general increase in consumer prices and worsening price expectations, and thus rapid inflation will not be so easy to stop.
Rising consumer prices do not mean that the next day the population will buy less goods or reduce consumption of basic food products. Households are usually not characterised by a sharp reduction in consumer spending, rather they will try to maintain their own purchasing power for at least a short time (with the hope of "rapid" normalisation of price problems).
However, in conditions of limited income resulting from different reasons, including probable next coronavirus restrictions, the population will be forced to turn to maybe the only reliable source of additional income - cash savings in foreign currency, which is stored outside the banking system. It is important to underline that since confidence in the hryvnia is still not established, the population largely uses their foreign cash savings to spend during "difficult times", especially in cases of declining incomes or deteriorating purchasing power. With the improvement of economic dynamics (and income increase), the population traditionally invests part of the hryvnia "surplus" in the purchase of foreign currency.
The mass sale of foreign currency will have the direct consequence of strengthening the hryvnia. Consequently, we will have another "paradox" of the domestic economy: with rapid inflation the hryvnia will show a tendency to strengthen, which will provoke other imbalances in the economy of the country.
