TV3 programme Nekā personīga publishes thoughts on this topic from Latvian economists, as well as the measures taken by the Competition Council to check various reasons behind increasing food prices.
During the pandemic it was the objective of the government to prevent mass bankruptcy and unemployment by stimulating the economy with various support activities. Now the European Central Bank is trying to slow the economy in order to stop the unhealthily high inflation. For Latvia it means balancing between stagnation of the economy and an inflation spiral, TV3 journalists warn.
Inflation is slowly going down everywhere in Eurozone. It is currently the highest in Latvia. Last year, inflation in this country reached 22%. It has been slowly going down since then. In March, for example, it was 17.2%. While previously the Bank of Latvia predicted inflation dropping to 10%, now the bank allows the drop to be as deep as 3%.
Throughout the entirety of 2022 the price rise in Baltic States was the steepest in Eurozone.
Bank of Latvia governor Mārtiņš Kazāks comments:
“We were very closely tied to Russia and Russian energy resources, which also resulted in the strongest hit. The next topic at hand – we have seen prices surge for food and energy prices worldwide. Unfortunately, for us as the relatively poorest Eurozone country this price basket is bigger. This is why it struck at the majority of wallets in the country.”
Economists explain that house maintenance and food occupy the biggest share in the inflation measurement formula.
However, market laws cannot explain the rise of all prices – strangely, but the suspicious portion in inflation continues going up.
Kazāks continues:
“It seems that in some sectors competition is not sharp enough, which allows businesses to increase prices only because other are doing it. Unfortunately, what we see in our models is that in the past quarters this undefined share of inflation is gradually becoming larger. This is an effect of shamelessness, when prices are increased just because others are doing it, making the situation even worse in the process.”
Council chairperson of the Fiscal Discipline Council Inna Šteinbuka agrees with him:
“The lack of competition contributes to the price increase in our country. Having a narrow market, which dictates the pressure on price rise from the side of suppliers, requires studies to see if it is necessary to improve competition. There is room to think what the Competition Council and other state institution could do there to improve things.”
Nekā personīga reports that the Competition Council has commenced an inspection over the continued growth of prices. The council wants to find out at which stage a large markup is added to food prices.
Competition Council’s Unfair Commercial Practices Prevention Office manager Sanita Uljane comments:
“The Competition Council continues market supervision in multiple directions in regards to ensuring compliance with fair retail trade practices. The first thing we focus on is the relationship between the supplier and retail trader to make sure there aren’t any unfair trade restrictions or other factors that distort competition.
The second factor we’re looking at is the price correlation in the realization of products from the producer to the point of sale. In simple terms – we are looking at the stages at which prices become larger.”
The Competition Council carefully follows variations of prices of specific products as well. Conclusions may come around the end of the year. Both producers and retailers are suspected of using the situation for their own ends.
Market shares of two of the biggest chain food stores – Rimi and Maxima – have increased from 46% to 60% in the past 15 years.
The Competition Council believes that this is not exactly an oligopoly, because there are also multiple smaller chains. One of the directions being studied now is Lidl’s entry to the market and how it could help improve the situation. So far Lidl doesn’t have enough stores to influence the two major players.
Kazāks comments on the situation:
“Companies’ profit margins, their profitability will remain very good and strong. In some sectors it may be on a rise. And this is where the element of shamelessness appears – because the moment the economy becomes weak and inflation is so high, it is normal for profit margins to shrink, which slows the economy and inflation in general.”
Of all the large traders only Maxima has submitted its account for 2022. It states that its profits remained on the level of previous years.
The programme admits: it is unfair to put the entire blame on food producers or traders. Fiscal Discipline Council allows the laws of economy did not come to pass due to “envelope wages” as well.
Last year wages in Latvia increased by an average of 8%, whereas inflation passed the 17% mark. Under these conditions people usually spend less money, causing prices to go down. However, there was no drop in retail trade. This can be partially explained with people spending the savings accumulated during the pandemic.
The government too has certain ways to help slow the inflation. However, it does not seem politicians are too eager to do it. Chairman of Saeima’s Budget and Finance Committee Jānis Reirs explains:
“Yes, we have the means, but we cannot use them.
The main tool to reduce inflation is a sharp reduction of the budget, its consolidation.
We will continue monitoring the situation. If there is another sharp increase of energy prices in autumn, we will prepare programmes to help support residents. Of course, it does influence inflation decline rate, but we cannot put all of this negativity on the shoulders of residents. And so we will have to assist with this situation using the budget.”
Nekā personīga admits the biggest concern at the moment is how the inflation spiral could play out – how it happened in 2006 and 2007.
Kazāks:
“Inflation is starting to maintain itself – this is the problem. Residents and businesses expect inflation to be even higher next year. This also means higher prices. This pushes wages upwards as well. Inflation spiral is one contributing element here. The good news is that we have yet to see it.”
Reirs:
“We remember 2008 and 2009. There were expectations that this crisis will turn out similar. I think the craziest development that happened then was unemployment, because unemployment causes many negative consequences, and our main objective was protecting workers from lay-offs.”
Kazāks on the situation:
“There is no recession in the economy, but growth is very weak. Are the risks of recession over? No, they aren’t. The growth of interest rates can slow down the economy not only in Eurozone. If inflation turns out high for long, these slowing factors will need to be tightened.”
In the beginning of Mary the Council of the European Central Bank will decide on future measures to limit inflation. It is very likely the central bank will increase interest rates again.
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