Food prices in Latvia could increase next year as a result of rising fuel costs, the Ministry of Finance (FM) has warned.
The ministry explained that the indirect impact of high oil and gas prices on food and other goods and services is currently limited. However, the longer energy prices remain at their present elevated levels, the greater their impact on other products and services will become.
Fuel and gas prices are significant cost components in food production, processing and logistics, meaning food could become more expensive next year.
Consumer prices in October this year were 0.4% higher than in the previous month and 3.1% higher than in October last year.
On a monthly basis, price increases were driven by higher electricity, heating and air transport costs.
Meanwhile, annual inflation was mainly influenced by rising prices for fuel, housing-related services, tobacco products and recreational services, the ministry explained.
Inflation in Latvia has fluctuated around 3% in recent months and, despite pressure from fuel prices, has not accelerated, unlike in the eurozone, the FM noted.
While annual inflation in the eurozone stood at 1.7% in January, it had risen to 4% by October, according to the flash estimate.
The main reason for accelerating inflation in the eurozone is the increase in global oil prices, which has significantly affected fuel prices, particularly diesel, across Europe.
The ministry noted that Latvia is no exception, with rising fuel prices making a substantial contribution to consumer price increases since March.
In October, fuel price increases accounted for almost half, or 45%, of annual inflation. However, the impact of higher fuel prices in Latvia has been largely offset by falling food prices, the ministry pointed out.
In October, food prices were 5.4% lower than a year earlier, reducing overall annual inflation by 1.1 percentage points.
Annual inflation is likely to remain around 3% in November but is expected to accelerate from December, according to the ministry’s forecast.
In October, the average price of diesel at Latvian filling stations was 2.079 euros per litre, representing an annual increase of 38.1%.
Meanwhile, the average price of 95-octane petrol was 1.932 euros per litre, an increase of 27.9% compared with a year earlier.
On a monthly basis, fuel prices remained virtually unchanged.
The ministry stressed that this is particularly significant given the reduction in excise duty rates for both diesel and petrol that took effect on the 1st of October.
At first glance, monthly data might suggest that the excise duty reduction had no impact, as fuel prices remained unchanged over the month.
However, weekly fuel price data show that both petrol and diesel became cheaper during the first week of October.
The price of 95-octane petrol fell by approximately 7.5 cents per litre, while diesel prices decreased by just 1.2 cents per litre.
Oil prices began rising again from the second week of October.
While Brent crude oil cost around 100 dollars per barrel at the beginning of October, its price had increased to 115 dollars per barrel by the end of the month.
The Ministry of Finance therefore concluded that the excise duty reduction had a positive effect on fuel prices, but rising oil prices completely offset that benefit.
Given that Brent crude oil prices had fallen to 89 euros per barrel by the end of the first ten days of November, the ministry believes this could have a positive impact on fuel price developments.
The decline in oil prices during the first week of November is a positive development, the ministry noted.
However,
as military confrontation in the Persian Gulf region continues and no ceasefire has been reached, there remains a high risk that oil prices could begin rising again.
Falling food prices are helping to soften the impact of higher energy costs, the ministry stated.
Food price deflation has been recorded in Latvia since April this year, with the annual rate of decline becoming more pronounced each month.
In October, food prices fell by 5.4% year on year, compared with a 4.8% decline in September.
The ministry welcomed the fact that price reductions have been recorded across virtually all food categories, rather than only those subject to the reduced value-added tax (VAT) rate introduced on the 1st of July this year.
The FM expects food prices to continue declining on an annual basis during the remaining months of this year.
However,
looking ahead to next year, food price increases will most likely be unavoidable, the ministry forecasts.
Although data from the United Nations Food and Agriculture Organization (FAO) show that the global food price index fell by 1.2% in October compared with September, the decline was driven by lower prices for meat, dairy products and cereals.
At the same time, global food prices remained 5.9% higher than a year earlier.
The ministry noted that trends in Latvian food producer prices are mixed.
On the one hand, food production prices continue to show a downward trend, although the annual decline in September was 1.6%, the smallest decrease recorded over the previous four months.
On the other hand, food producer prices increased by 0.6% compared with August.