Average annual inflation may reach 2 – 2.6% in Latvia next year, as LETA was told by interviewed bank analysts.
Swedbank Latvia Chief Economist Līva Zorgenfreija told LETA that average annual inflation in Latvia will reach 2.6% in 2025.
She pointed out that after 2024, which in terms of inflation was accompanied by a marked decline in energy costs, in 2025 housing-related costs, including utility bills, are likely to remain around the level of this year as a whole. Electricity prices on average per year are likely to be higher than in 2024, while heating prices could still see a downward trend. A rise in fuel prices is not expected, because although excise will grow, analysts predict that global oil prices will remain around the end of 2024 or even at a lower level.
Zorgenfreija also noted that alcohol and tobacco prices, as well as soft drink prices, will rise next year as excise climbs. Taking into account the direction of world food prices and the rise in wages observed in Latvia, food prices are also likely to continue to grow.
She also stressed that intervening in market mechanisms to artificially lower food prices, for example by setting mark-up ceilings, is not the right way to “address” the high level of food prices. “This type of intervention will only distort the competitive environment, may lead to a shortage of certain goods on store shelves, and would most likely lead to a price jump after the restrictions have ended. In addition, this would be another example of Latvian politicians interfering in the activities of the private sector, which will further worsen investors’ impression of the business environment in our country,” she said.
She also added that prices for services will continue to rise as wage growth, while slowing down somewhat, will still be quite rapid.
A pleasant signal for consumers, according to Zorgenfreija, is the drop in Chinese export prices for more than two years now. If China, as the world’s largest producer, exports deflation, it relieves the pressure on the prices of various imported goods with us in Latvia.
Luminor Bank economist Pēteris Strautiņš told LETA that Latvia’s average inflation in Latvia may slightly exceed 2% next year.
At the same time, he also pointed out that in the first two months of 2025 the price rise will be faster by about 3%, but in the coming months until the summer it will be pushed down by a sharp decline in services inflation. “In the first half of last year, average monthly service inflation went far above the norm, echoing the sharp rise in wages,” Strautiņš said, adding that since July of this year, services inflation has returned to normal during the month and big jumps are no longer expected.
Brooks also noted that food inflation could still be above average due to the high base at the end of 2024. The greatest expectations for a decrease in the price in one of the main product groups are in the oil and fat segment, thanks to the fact that after the drought of 2023 in 2024 there was a very good olive harvest. It is also possible that prices will fall slightly for sweets, with exchanges being adjusted for exaggerations of the 2023 sugar price.
A drop in prices, according to Strautiņš, is also possible in the vegetable segment next year if the weather conditions are favorable. “Vegetable prices this year are almost 60% higher than in 2020, although such a large increase in production costs has hardly happened,” he added.
Luminor Bank’s economist also noted that the dynamics of energy prices in the coming year could be favorable for consumers, similar to this year. The cost of housing maintenance will not change much during the year. It is possible that the average annual prices for heat and electricity will decrease slightly. By contrast, rents are rising and will continue to rise as incomes rise, water prices are also likely to change upwards overall.
According to Strautiņš, long-term commodity prices could be broadly stable or even go down, as has been the case historically, adding to the correction of the exaggerations that have occurred during the pandemic, which are still ongoing. For example, in November, vehicle prices were 4% lower than a year ago.
Dainis Gašpuitis, macroeconomics expert at SEB Bank, predicted to LETA that in 2025 the average annual inflation rate in Latvia could be 2%. Prices for both food and utilities and health services will continue to rise next year.
He also noted that at the end of 2024 we are experiencing a wave in inflation, which will intensify in the coming months. Inflation could hit the 3% mark in December, but then retreat again.
“Inflation has now reached levels that the European Central Bank (ECB) considers to be low enough to provide low inflation benefits. But the majority of the population is of a different opinion and their perception of inflation is higher,” said Gašpuitis.
He pointed out that lower energy prices are still dragging inflation down, while in the other segments, price growth continues at different rates. This is particularly acute when the surge affects food, health and utilities.
“Although the increase in wages ensures that purchasing power is restored, it is proceeding very unevenly. Therefore, it is not only in Latvia that fatigue caused by the high inflation that has gone away is felt and creates a resonance in society. This is also because, although inflation is low, it implies further price increases and there has not yet been a full adjustment to the price levels reached during the period of high inflation,” said Gašpuitis.
He also conceded that the setup for more state intervention in pricing would remain in place in the near future. However, it threatens rather with an increase in the bureaucratic burden and complexity of business, although the opposite should be done. The most important risk to the resilience of inflation is the potential volatility of energy prices, which is not a major concern at present.
Citadele Bank’s Chief Economist Kārlis Purgailis told LETA that in recent months, Latvia has seen a slight acceleration in inflation in Latvia, however, inflation is projected to hover around 2% in 2025, which is in line with the ECB’s target level.
“We predict that by the end of 2025 inflation in Latvia will be 2.2%. We expect that the pressure on the average level of consumer prices, in particular for food, continues to maintain as internal consumption increases,” he said.