Disinflation comes with heating, writes Luminor Bank’s Pēteris Strautiņš, commenting on changes to consumer price in August, when their level in Latvia was 5.4% higher than a year prior. Latvia’s Ministry of Finance does see a drop in inflation with the drop of fuel and energy resource prices.
The economist notes that since March 2023 inflation has been mostly lower than it usually is in this period of time. The price level in August increased by only 0.35% when compared with March. Living expenses at the moment are on the same level they were in April.
“In August inflation when compared with July went down by one percentage point.
Half of it comes from food products, alcohol and tobacco products,
the rest is a small contribution from transport costs, which continued going down as the year went by. Product prices went up 4.2% over the course of the year. A year ago inflation for goods was 26.2%.
Inflation of services went down more gradually. In August it was 9%. Its highest point was in January (11.7%). It is expected that the average inflation level this year will be around 9%. At the end of the year it will be 1-2%.
Disinflation
or the drop of inflation will continue next year as well.
Over the course of the month prices went down by 0.6%. The month’s deflation was slightly stronger than the average observed of the past ten years (-0.23%), but it was slightly weaker than expected – the picture suffered from transport cost growth of 2.2%, as oil prices went up.
Price changes in the remaining months of the year will be very small.
In October there will be a significant drop in heating tariffs.
In March in the Luminor Bank’s economic outlook we predicted the heating price for the next heating season could be around 80 EUR/MWh. It is likely this will be the case. The average is very wide: there are cities in which the price, starting with the 1st of October, will be below EUR 70 – Aizkraukle, Jekabpils and elsewhere. In other places the price could be above EUR 90, such as Saldus. Last year the average heating price in winter – even with support from the state – was above 110 EUR/MWh.
Prices of food and non-alcoholic beverages when compared with the previous period continued going down for the fourth consecutive month. In August deflation (-1.8%) was the strongest since 2014. Price changes of important resources (cereals, fresh milk, electricity) indicate that food prices should go down some more. This will happen very gradually. Producers and traders will want to retain additional profits generated by reduced costs. However, it could happen sooner or later.
The new electricity distribution tariffs caused a large political drama. They are unpleasant. However, the electricity price for households was still 6.7% lower in August than a year ago. Additionally, changes to tariffs were beneficial to businesses, especially those whose load is relatively even; food processing companies and stores are among them. Competition can always be better, but we cannot say it does not exist at all. We will wait for some of those benefits to be transferred to consumers.
The growth of fuel prices slowed down the drop of inflation.
Currently there is a very high oil price combined with the very large difference between oil and petrol product prices. There is a reason for the slowdown. During the pandemic many European factories were forced to halt production. There is also the issue of limits on exports of Russian diesel. One ray of hope comes from plans to establish a new oil processing factory in Nigeria and the growing processing capacity in Asia.
Despite the lucrative recycling, the desire to invest in it is limited, as a decrease in consumption is expected with the spread of electric propulsion. Users of petrol cars can watch more hopefully as the price of petrol on the stock exchanges went down at the beginning of September. The price of gasoline at the time of writing is 2.9% higher than the annual average, while oil prices are 12.9% above the annual average and the price of diesel is even 16.8% above the annual average.
During the basic needs drama too little attention was paid to prices of durable goods, but they are important nonetheless. Audiovisual, photographic and information processing equipment have become cheaper for five consecutive months. Tools and household appliances have become cheaper for three consecutive months. Cars became more expensive in August after three months of deflation. However, their price level remains lower than it was in February. The price drop for durable goods and production equipment also had an effect on inflation, both directly and indirectly,” Strautiņš concludes his outlook.
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According to the Ministry of Finance, inflation in Latvia continues going down together with fuel and energy resource prices. The ministry does admit – although the price rise has been slow since the start of the year and the inflation recorded in August is the lowest it has been in the last two years,
the ongoing price growth is considered high,
especially now that speed of development of Latvia’s economy has slowed down.
The high price level causes residents’ consumption go down. This also negatively affects investors’ activities in financing new projects. A similar situation is observed in other Eurozone countries, in which inflation both directly and indirectly has a negative impact on economic development.
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