Compared to the previous month, inflation rose by 0.8%, while the annual rate stood at 14.3% (compared to 1.3% and 15.9% respectively in May). Average monthly inflation rates have remained at around +1.0% for a year now. The June slowdown in inflation growth was insufficient to meet the National Bank of Ukraine’s (NBU) forecast targets for the first half of 2025. The NBU’s April forecast projected inflation at 13.8%, while the forecast from a year ago was 9.8%. Thus, the NBU’s inflation forecast error is 4% over a two-month horizon and 32% over a one-year horizon.Inflation structure. The variation in price increases across individual goods and services exceeds 30 percentage points, indicating the dominance of non-monetary (situational) factors in inflation dynamics.For a year now, prices for utilities (electricity, gas, heating, water) have remained fixed. The impact of the devaluation-inflation spiral on inflation has been significantly reduced (annual hryvnia devaluation against the U.S. dollar was only +3%).However, the inflation baton has been taken over by food products: price increases exceeding 20% were recorded for eggs (+59%), bread (+22%), vegetables (+24%), fruits (+52%), butter (+28%), sunflower oil (+34%), milk (+21%), and meat (+23%).In contrast, there was almost no price growth for leisure services (+1%), utilities (+2%), household goods and appliances (+2%), rail passenger transport (+1%), and motor fuel (+3%). Prices for clothing and footwear decreased (-5%).The key feature of Ukrainian inflation is its predominantly cost-push nature. Numerous non-market factors (war damage, weather conditions, tariff increases) caused a 29% annual increase in wholesale industrial producer prices, exerting significant pressure on consumer prices. Cost-push inflation factors do not respond to changes in the key interest rate. The transfer of rising intermediate production costs to selling prices occurs independently of changes in credit resource costs.At the same time, per capita consumer demand remains below the pre-war level (only 91%). While consumer demand is gradually recovering, war-related factors keep it asymmetric and mostly focused on essential goods.Impact of monetary policy on inflation. For the third consecutive year, the National Bank of Ukraine (NBU) has maintained ultra-tight monetary policy parameters. On March 7, the key interest rate was raised to 15.5% annually, and on April 4, the rate on 3-month deposit certificates was increased to 19.0% annually.However, the NBU’s key interest rate has limited influence on inflation due to the dominance of cost-push factors and the weak transmission channels of monetary policy (credit, currency, capital, and deposit markets).During the war years, banks have failed to attract significant volumes of hryvnia deposits into the banking system. Currently, time deposits in hryvnia make up only 6% of consumer spending. In the first five months of 2025, hryvnia time deposits by the population increased by just ₴23 billion, while spending on foreign currency purchases reached ₴135 billion over the same period.Impact of currency policy on inflation.Since October 2023, the NBU has implemented a managed flexible exchange rate policy. Since then, the hryvnia has depreciated by 14% against the U.S. dollar and by 24% against the euro. This has triggered a depreciation-inflation spiral.Thus, the currency liberalization policy has become an additional pro-inflationary factor in Ukraine. Currently, the key interest rate does not influence the exchange rate transmission channel, since the hryvnia’s depreciation results from the NBU’s directive decisions on currency interventions rather than market fluctuations in the exchange rate.Fiscal deficit factor. The fiscal deficit remains high (over 20% of GDP) and exerts pro-inflationary pressure. However, a restraining factor on fiscal inflation is the predominantly defense-oriented nature of the deficit and the suppression of consumer demand due to wartime uncertainty. The key interest rate does not affect the fiscal inflation channel because the size of the deficit is driven by wartime needs rather than the cost of domestic borrowing. Moreover, over 90% of the fiscal deficit is covered by external sources, whose availability is not influenced by the NBU’s rate.War-driven inflation factor. The NBU’s key interest rate cannot influence wartime inflation factors, which are non-market in nature. War shifts consumer priorities and the cost structure of producers. Consumption of life-critical goods occurs regardless of interest rates. Product prices include additional costs for security, logistics, or energy supply caused by the war.On the costs of monetary policy. Most inflationary factors in Ukraine lie beyond the scope of the NBU’s monetary policy, which is very costly for taxpayers. The NBU’s monetary policy expenditures totaled around UAH 250 billion from 2022 to 2025, including UAH 76 billion in 2024 and UAH 40 billion in the first half of 2025.Inflation forecasts. By the end of 2025, the NBU expects inflation to decline to 8.7%, which seems unlikely given the pass-through effects of producer prices, weather-related disruptions, and significant fiscal pressures. The forecast from the Ministry of Economy appears more realistic, projecting inflation at 9.5% for the year.The NBU’s inflation forecasts have an error margin of 30–50% on a one-year horizon. This highlights both the ineffectiveness of its anti-inflationary tools and the inadequacy of the inflation models used by the NBU, which are demand-oriented (based on classical monetary planning standards) and fail to incorporate cost-push factors.Currently, both inflationary and disinflationary factors are influencing the inflation rate. Inflationary factors – high growth of producer prices, weather conditions, significant fiscal deficit, increase in certain tax rates, recovery of deferred demand in the event of cessation of hostilities, devaluation of the hryvnia against the euro. Disinflationary factors – significant slowdown of economic growth (real GDP for 5 months of 2025 increased by only +1.0% compared to the previous year), preservation of the moratorium on raising a number of utility tariffs, relative exchange rate stability (ensured by NBU currency interventions), restraint of demand due to continuation of hostilities. In the coming months, some stabilization of the annual inflation rate is expected mainly due to the statistical base effect of the previous year.Instruments for overcoming inflation. Given the predominantly structural nature of Ukrainian inflation, overcoming it should focus on the application of monetary instruments for expanding supply rather than reducing demand. The potential of monetary policy should be used in the direction of developing lending and investment to expand the supply of domestically produced goods and services, which will reduce the risks of structural inflation and at the same time contribute to the development of the credit channel of monetary transmission.Exclusively for EspresoAbout the author. Bohdan Danylyshyn, academician of the National Academy of Sciences of Ukraine.The editorial team does not always share the opinions expressed by blog or column authors.