The report from the Central Statistical Bureau of Latvia published on Wednesday, the 11th of January, mentioned the following: in December 2022 the average price level in Latvia dropped by 0.5% in comparison with November. This caused economists of Latvia’s biggest banks to prepare optimistic outlooks for the future.
SEB Bank economist Dainis Gašpuitis, for example, wrote that the peak of inflation has already passed. This was signalled by energy price dynamic. According to him, the main reason for the drop in December was the drop in fuel prices and discounts for clothes and footwear.
The unpleasant news is that food prices continued going up over the course of the month.
Communication service prices and housing costs continued going up as well.
December’s data, according to Gašpuitis, do not indicate a general deflation – the price rise may yet surface in January and February: «Tariffs may yet increase. There is also talk of businesses starting the year with updated prices for their products.»
In Q2 inflation may turn out a single digit value. Possible air temperature records and a weak global economy may maintain energy prices at a relatively low level. Short-term drops are possible as well.
Even if oil and gas prices increase, there is no indication they could return to last year’s peaks.
The situation will remain uncertain and highly volatile. Current raw material and energy price trends indicate the price increase may appear for food as well, with a possible drop in prices for certain products later in spring, said Gašpuitis.
«Up until the middle of the year inflation in Latvia may drop below 10%,» says Citadele Bank expert Mārtiņš Āboliņš. There are signals of inflation going down this year. Last year, for example, producer price inflation in Europe dropped from more than 33% in August to 21.8% in November.
Inflation drop does not immediately mean prices will become lower soon, he warns.
Mostly it means that the price growth will not remain as rapid. Gas price drop in Europe (prices have dropped by more than 70% since summer) is definitely a positive factor for Latvia’s economy. However, the influence will not be immediate. The drop in gas prices will be experienced by those who have dynamic electricity tariffs, because electricity prices at Nord Poll exchange have dropped by from more than 400 EUR/MWh in August to approximately 100 EUR/MWh in recent weeks.
At the same time, natural gas in summer was procured at relatively high prices. This is why heating prices in Latvia will not change significantly this heating season. If gas prices remain on the same level, heating and gas prices may go down in the second half of 2023.
However, challenges related to the inflation are not over yet. Service price rise in Latvia exceeds 10%, and it is too soon to expect inflation to return to a stable and low level.
It is also difficult to predict if gas prices could continue going down. Gas consumption in Europe went down by approximately 20% in 2022. This helped reduce prices, but the drop in gas consumption also came with a severe drop in production volumes in multiple industries.
A recession is expected in Latvia as well.
However, the moment the global economy starts growing again, the situation may change. This is indicated by the future gas deal prices, which are slightly higher than current prices, warns Luminor Bank representative Pēteris Strautiņš. According to him, housing costs will soon join the «deflation friends club». The first news about the drop in heating tariffs appeared approximately one month ago. Other tariffs, however, continued going up regardless of procurement strategies of various businesses.
The expert has no doubts the next heating season will be cheaper.
Strautiņš says gas and wood chip prices will go down, and the drop in heating tariffs will be measured in dozens of percent.
In January electricity price in Nord Pool in Latvia’s zone was lower than it was in November and December. Electricity prices will affect gas prices, which have dropped by more than half since the highest point in December.
«It is becoming harder and harder to believe that Europeans may experience difficulties with gas stores, considering that gas stores increased in two weeks this winter,» said the economist. «It is possible that at the end of winter gas stores will be approximately as large as they were at the start of last winter.»
Events that help stabilise prices can be seen in various places, said the expert. Producer prices on the local market have gone down three months in a row. The highest point of inflation was observed in August 2022.
«In December food prices went up 1%, but there is no reason for prices to continue going up, which is why consumers should oppose attempts to increase prices by choosing other products,» said Strautiņš. Since mid-2021 many consumers have perceived rapid price rise as a natural disaster impossible to oppose. The time has come to break free from this belief and instead start carefully analysing producers’ and merchants’ offers.
One psychologically important point on the path towards price stability is reaching a single-digit inflation value, which will likely happen in May. Annual inflation will go down not because something happens, but because nothing special happens – in the first half the price level will be rather flat; the annual inflation will go down due to the so-called base effect.
Food will remain one of the pillars of inflation in autumn. There are also various services, the costs of which mainly compose wages. At the same time, other forces will pull the situation in the opposite direction. First of all, there will be a rapid drop in housing maintenance costs. There are also hopes for a price drop of lasting goods.
Oil prices are in question as well, says Strautiņš, adding that future contract prices allow for the hope that transport fuel costs may gradually go down. In 2023 average inflation may be at 7% to 8%, as the year started off with inflation of more than 20%.
«In December inflation hit the brakes,» said Swedbank economist Laimdota Komare. Currently both gas and electricity prices in exchanges are away from their peaks. Nevertheless, residents of Latvia’s regions have yet to see them. The country’s support measures helped limit inflation growth. Without this support, residents would paid more for gas, heating and electricity.
So far food prices in Latvia still do not reflect the global food raw material price drop. This is likely because prices in shops are affected by higher energy and labour force costs.
The fuel price drop reflects the oil price drop observed in previous months. Financial markets expect the global oil price to go down even more. Nevertheless, it is possible OPEC+ may decide to act to limit further oil price drops.
According to a flash estimate from Eurostat, inflation in Eurozone was 9.2% in December. Annual inflation went down in nearly all Eurozone member states (except for Malta and Slovenia), which is thanks to the slow energy resource price drop. It seems the peak of inflation in Eurozone is over, said Komare.
«Last year inflation was affected by global price rise for energy resources and food. This year the price rise will stabilise,» said Latvian Ministry of Finance Analytical Service expert Ieva Šnīdere.
Of course, the representative of the state power stressed that inflation was slowed by the support provided by the state and compensations paid for distribution and transmission services at the beginning of the year. Discontinuation of the mandatory procurement component in September also contributed to this, she said.
The ministry’s analyst predicts this year consumer prices will stabilise again. The main effect on price changes still comes from energy resource and food product price fluctuations around the world. An indirect effect will also reach prices of industrial goods and services. «Considering the continued uncertain geopolitical situation and inflation dynamic, annual inflation is expected to reach 9% in 2023,» says Šnīdere.
Also read: Economist: high inflation in Latvia also comes from economy’s structural problems