Pēteris Strautiņš, Luminor Bank economist
Lately the media in Latvia have been taken over by some mystical post-Christmas emotional height about the country’s economy – endless tragedy, disappointment and tears. Let’s calm down and look at statistics that help shape the major processes in a logical manner.
Annual inflation in Latvia continued going down in July, it was one and a half percentage points below June’s or 6.4% as opposed to the previous 7.9%. Inflation drop in June was record fast (-4.2 percentage points), because it was dictated by both the base effect (the dramatic events of 2022) and the unusually large price drop that month.
In July there was nothing to help with the base effect, because prices had increased by 0.7% when compared with the previous month.
However, it is expected that
data for August may show a noticeable deflation
and the inflation drop could speed up again, dropping below Eurozone’s average level.
Excluding the influence from electricity tariff rise, the level of prices did not change significantly over the course of the month. In Lithuania consumer prices went down by 0.2% over the course of July. In Estonia they went down by 0.6%.
It is easy to lose yourself in the chaos of base effects and current events. This is why we can look at the general picture the following way. After a ten-year period of moderate inflation (June 2011 to June 2021 prices increased by only 14.4%) the price level started rapidly going up in the second half of 2021. The rapid rise of expenses continued until March 2023, with the consumer price index growing by 28.5%.
Then the price level stabilised, growing by only 0.2% in three months. This was followed by a price rise in July, which was dictated by changes with the electricity distribution tariff. But August will compensate this growth, perhaps with excess, and the price level will return to approximately where it was in March.
Unless any major global catastrophes happen, the overall consumer cost level in Latvia in the next two to three years will change very little. Services dependent on labour force costs will continue going up in price, but the raw material prices and global transport cost drop will continue putting pressure on prices of goods.
One of the most important events of July: we can see – in data and store shelves – a tangible drop of food product prices. Over the course of the month food products and non-alcoholic beverages because 1.2% cheaper. There are two effects at work here – seasonality, which affected vegetable prices and the fact that traders were forced to gradually give consumers a price drop.
Food product prices tend to go down in July, but usually by no more than one percentage point. August is usually the celebration of seasonal deflation. FAO Food Price Index is 22.4% lower than it was in March last year. Another important factor is the gas and electricity price drop observed since last year’s August. The effect from the recent electricity distribution tariff review on businesses is close to neutral, but the effect on processing industry and food trade cost-reducing.
However, the food price drop will not be worth a full perimeter.
Unfortunately, meat prices will continue going up in various stores. The average pork and poultry prices in the EU are at an all-time high. Pork prices have historically been quite volatile, but poultry prices in the last decade, considering events of the last couple of years, and we are now about 50% above this level.
Sugar prices at exchanges differ strongly from the general trends. This means sweets could become more expensive. However, prices of dairy products, bread and vegetables should go down. Over the course of the past month there has been a large amount of worry about the risk of prices of raw materials going up, but this is exaggerated. Attacks on Ukraine’s grain export infrastructure was criminal – just like Russia’s attack on Ukraine in general.
But these events have failed to affect wheat prices by a great deal.
The rise of electricity distribution tariffs increased electricity prices for households by 5.5% over the course of the month. However, the level of these costs remained below the highest point observed in May. In the coming months these energy resources – heat, gas, electricity and firewood – should become cheaper again. The electricity price for households grew by 17.6%, with inflation growing from 6% to 13%.
In August and September it will turn into deflation, because last year prices in both those months were especially high, exceeding the levels observed in July. At the beginning of August electricity was cheap on the exchange. Reports are coming in about lower heating tariffs. The first news about lower water supply tariffs are coming in as well. This is related to the drop in electricity prices.
The rise in the cost of essential goods and services over the last two years has been the most worrying, quite rightly so. But the consumer price index is also influenced by the prices of durable goods. For goods such as household appliances, information processing devices, and car prices increased by about a tenth after a long period of price stability. For audio and video equipment, prices stabilized during this time after a prolonged downturn.
The price level of durable goods peaked in January-March, and now we see a gradual return to long-term trends.
Also read: Latvian residents worried the most about the rise of utilities, electricity and food prices