Pēteris Strautiņš, Luminor Bank economist
In June consumer yearly prices went up by 7.9%, whereas monthly prices went down by 1.4%. This is a new monthly deflation record. The previous one was -1.1% and remained for a while since August 2003.
August is a month for seasonal deflation. Prices generally go up around June when compared with May. Even before June 2023 there were several exception (-0.5% in 2009).
The result of this year’s June is rather unusual. Poetically speaking, the price level in Latvia since autumn 2022 has been as though a rock tossed upwards, continuing going up thanks to inertia. But now this energy from the initial toss has run out – the rock is falling down. The drop will continue in the coming month. In June the downward-facing influence on the price level was observed for all three main sources of life expenses – housing, food and transport service expenditures.
Annual inflation has sharply went down (from 12.1% in May to 7.9% in June),
but it remains much higher that is was until 2021. Compared with June 2022, the influence of food and housing expenditures on the general price level was generally upward-facing. These positions composed 78% of the total price rise. The situation will rapidly change as global developments and their influence continues soaking through the consumer price basket. It is expected the inflation will go down by another four percentage points around July and August.
Latvia may see the start of the deflation period at the beginning of next year. It won’t be very long, inflation will come back in the second half of the year. Prices of many services will continue going up. The wage level should go up as well. However, the role of dropping food and energy prices will turn out decisive here.
Last month a healthy intellectual discussion commenced on how high a point this symbolically described rock had reached in flight, as well as whether the drop could start sooner. Latvian Traders Association (LTA) has presented a report that states how in Q2 prices went down by 70% for products listed in their study. The association also mentioned specific examples. For example, the price of milk cost 29.8% cheaper in June than it did in March. Data from the Central Statistical Bureau of Latvia (CSP) shows that 1 l of milk cost 5.2% more in June than it did in March. Who is telling the truth?
It is possible traders are closer to the truth even though state statistic data creators have more credibility, because they are an interested party. Inflation data composition can be described as an intellectual game, the rules of which are written according to the principle of the lowest common denominator – to make sure all countries are able to follow them. In Latvia, a generally digitally developed country, the game can definitely be played differently.
If CSP requested and received data from traders on actual sale prices of various products, then we would get a better picture of the situation. If the goal was to obtain the clearest picture of the price level and changes in Latvia, statistical data would be composed completely differently. However, the methodology needs to be unified in order for results to be comparable.
It would seem that
the data fog is created by Latvian traders’ addiction to various discount events to attract buyers.
The first half of 2023 was the period of bloom for such strategies, when prices of similar products varied more than two times with and without discounts. This could reduce data accuracy because statisticians are unable to take into account the effect of discounts on buyers’ choice between different offers.
Every reader can tell if the average milk price in June (EUR 1.21) reflects his or her experience or if it is possible to purchase milk at a cheaper price. The question is almost rhetorical.
It is possible the national retail peculiarities make it difficult to compare the price level not only between different years in Latvia, but also in different countries. Discount-based trade strategy is very typical for Latvia and Baltics in general. It is very actively used by two market leaders.
There is another strategy called EDLP (every day low prices). In Germany around half of the market is taken by two traders whose operations are the closest to the ECLP model. One of them is rapidly expanding in Latvia.
In two countries with the same price level, the price displayed in the statistics will be lower in the country where the EDLP strategy is more common, since on average the arithmetic price tag will be lower there.
The aforementioned does allow for interesting assumptions. For example – if previous statistics exaggerated the rise in prices, then perhaps in the coming months it will exaggerate the fall in prices. Discounts cannot continue endlessly. Sooner or later, the average price tag in stores should be closer to the average actual selling price of the product in question.
This year’s average inflation outlook is already starting to go down. On the 19th of June the Bank of Latvia downgraded the annual inflation outlook from 10.0% to 8.5%. For this outlook to come true, and it is possible, there have to be several months with price drops comparable to the previous period. Until now, average or consensus forecasts assumed that, after Latvia’s average inflation has far exceeded the euro area average, it will come down to this indicator and then Latvia’s price level curve will move almost parallel to the euro area curve.
So it was assumed that the conditions that caused inflation in our country to differ from the euro area average only work in one upward direction. This is illogical, because if the high share of energy and unprocessed food in household expenditure initially works to the detriment of Latvian consumers, it must become a friend of consumers by falling stock exchange prices.
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