Natural gas prices in Europe are rising sharply again, but Latvian consumers will not feel the increase in their everyday expenses immediately. Unlike the other Baltic states, in Latvia the gas price shock reaches consumer prices with a delay of several months. However, this does not mean that the impact will be smaller – higher energy costs will gradually be reflected not only in utility bills but also in the prices of food, goods and services, according to Kārlis Purgailis, Chief Economist at Citadele Bank.
The benchmark TTF natural gas price is currently approaching its highest level this year. It has risen by 14% over five trading days, 24% over the past month and 83% since the beginning of the year. Citadele Bank estimates that the price shock will be felt later in Latvia than in Lithuania and Estonia, but its impact will be no smaller: a 10% increase in gas prices raises the overall price level by 0.54% over a twelve-month period.
The strongest impact will be felt in housing and utility costs, although it will gradually feed through into the prices of food, goods and services as well.
The main reason for the current surge in gas prices is the conflict in Iran, which began on 27 February and resumed in July following a period of relative de-escalation. The Strait of Hormuz, through which approximately one-fifth of the world’s liquefied natural gas (LNG) is normally transported, remains effectively closed, while Qatar’s export capacity is currently the main constraint on supplies.
However,
the increase is not being driven solely by the war-related risk premium – timing is also a significant factor.
European Union gas storage facilities are currently only around 60% full, compared with the usual level of around 80% at this time of year and the European Commission’s target of 90%. Europe is having to compete for limited LNG supplies at a time when storage levels are significantly below normal and fewer than three months remain until the end of the storage-filling season. This is precisely why the rise in prices has accelerated rather than eased.
To understand what higher gas prices mean for Latvian consumers, it is important to assess not only the scale of the impact but also how quickly higher gas costs feed through into consumer prices. In this respect, Latvia differs significantly from the other Baltic states.
Citadele Bank’s estimates show that market-based prices respond immediately to increases in gas prices. Prices for electricity, gas, solid fuels and heat energy, energy prices overall, administratively regulated energy prices, as well as prices for industrial goods and transport, begin to change in the same month that gas prices rise. By contrast, prices determined through tariff systems respond later.
The impact of higher gas prices becomes visible in overall inflation after three months,
food prices after four months, housing and utility costs after five months, core inflation after eight months, and services and restaurant prices after ten months.
The delay is particularly pronounced in food prices. In Latvia, they respond to higher gas prices after four months, rather than within one month as in Lithuania.
This is because energy costs for food producers change only after tariffs are revised, while retail prices cannot rise before the underlying costs that determine them have increased.
In terms of the scale of the impact, the overall pattern is familiar, although price increases are relatively modest across most categories of the consumer basket. A 10% increase in gas prices leads to a 2.28% increase in electricity, gas, solid fuel and heat energy prices, a 2.27% increase in administratively regulated energy prices, a 1.79% rise in overall energy prices, and a 1.43% increase in housing and utility costs.
A moderate impact is seen in industrial goods prices, which rise by 0.84%,
overall goods prices by 0.67%, processed food prices by 0.63%, food prices by 0.58%, and transport prices by 0.56%.
The smallest impact is seen in restaurant and accommodation prices, which rise by 0.42%, services prices by 0.17%, and core inflation by 0.15%. Put simply, price changes across most of the consumer basket are relatively small, with higher utility costs accounting for the largest share of the overall impact.
Comparing the three Baltic states, the overall twelve-month impact of a 10% increase in gas prices is almost identical: 0.54% in Latvia, 0.55% in Lithuania and 0.59% in Estonia. This means the scale of the price shock is similar across all three countries, but there are significant differences in how quickly it feeds through into inflation.
In Estonia, the overall inflation index responds immediately,
while in Lithuania the impact appears after two months and in Latvia after three months. The difference is even more pronounced for housing and utility costs: in Latvia, the impact becomes visible after five months, while in Lithuania and Estonia it is immediate.
Overall, the effects of higher gas prices will reach Latvian households later than those in neighbouring countries, but the scale of the impact will not be smaller. Most of the increase in everyday expenses will become apparent between the fourth and tenth months following the price shock.
The delay also offers a certain advantage: households and businesses have more time to prepare for higher utility and food expenses.
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