Wednesday, June 11, 2008

Ukraine Moving Towards Hyperinflation

Sealing the deal for the Swedish interest rate hike that I predicted two days ago was yesterday's Swedish inflation number, where the EU harmonized price index rose 3.9% on a year over year basis, up from 3.2% the previous month. The other consumer price indexes showed slightly different levels, but the same dramatic increase from the month before.

But as bad as that looks, it is still far better than in some other countries. Ukraine, one of the biggest countries in Europe in terms of the size of the population and geographic area, saw its inflation rate rise to a full 31.1%. Now, that's really bad, and a dramatic increase from the 14.4% I reported about last year.

If this is not dealt with appropriately, and that means restraining money supply growth significantly, then Ukraine runs the risk of falling into a full fledged hyper inflation spiral, as the high inflation causes demand for money to fall, which in turn causes the price increases to accelerate, which in turn causes further declines in the demand in money and so on. That in turn would destroy the economic recovery produced by the commodity price boom (Ukraine is a large net exporter of commodities, both agricultural products and metals).


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