Inflation will remain high for the next two to three months. After that, however, the inflation index will experience a sharp drop and may come close to zero by the end of next year, says Luminor Bank chief economist Pēteris Strautiņš.
In November 2022 the average annual inflation was 21.8%, according to data from the Central Statistical Bureau of Latvia (CSP). Consumer prices increased again throughout the course of the month, increasing by 1.1% when compared with October.
According to Strautiņš, while until now there were three pillars of costs that contributed the most to rising living costs – food, housing and transport –, the role of the latter is slowly going down now.
The drop in energy exchange prices is reflected in transport prices the most, prices of energy consumed by households has higher inertia. There is also the factor of the poorly functioning European gas market, stresses Strautiņš. The difference between monthly inflation and historical norms went down rapidly in October and went up again in November. According to Strautiņš, the effect from food and housing costs was equal in November, accounting for 15 percentage points or more than two-thirds of the total price growth level.
«The rest of the world, on the other hand, is experiencing a drop in production costs. This wave has only snowballed over the course of the past month,» said the economist, adding that one of the reasons for that is the market’s natural reaction to excesses – supply goes up at high prices, whereas demand goes down.
Another reason is not as optimistic – the global economy is drowning in recession.
S&P GSCI raw material index in euro value became 14.4% cheaper over the course of the month. Freightos Global container index went down by 24.8%. The steel market is not reflected on raw materials index due to the variety of steel products. The topic rarely appears in the headlines, but the price of this metal has completely stabilised and has returned to the level of the year 2020. Prices of certain steel products were reduced by more than half when compared with autumn of 2021. Through different machinery, transport and construction costs the influence of these prices reach out to different areas of the consumer basket, says the economist.
He also stresses that the prices of goods and services important to the global industry in a time when Latvia still had deflation of consumer prices, which continued until February of 2021. «Right now these sections of the global economic engine, previously hidden from the eyes of consumers, and the epicenter of the inflation quakes, are creating the opposite effect – deflation –, the waves from which are already moving towards buyers’ wallets,» says the economist.
«Inflation can be compared to a tree that looks healthy and strong on the outside but hollow on the inside.»
He also says that with the actual GDP up by approximately 2% this year, residents’ purchasing power is down by approximately one-tenth. Profits of various businesses has increased over the course of the year.
«Clearly consumers have taken the price increase lightly in the middle of rapid changes. The concept of reasonable costs that solidified in the minds in the past ten years is shattered,» stresses the economist, adding that now is the time to restore this idea.
Also read: Inflation in Latvia reaches 21.8% in November