In Latvia the average annual inflation in 2023 may reach 9%. At the beginning of the year inflation may remain very high – 20%. By the end of the year, however, it may drop as far as zero, according to analysts of Latvian commercial banks.
At the same time, analysts say the perspectives of inflation will be largely dictated by energy price changes.
Swedbank acting senior economist Agnese Buceniece believes at the start of next year inflation will continue limiting residents’ purchasing power and weakening consumption. This means demand for goods and services that are not in the necessities basket, will go down.
«Although the peak of inflation is near, it is possible it has already passed, we expect inflation to to back away over the course of the year. Nevertheless, it will remain unpleasantly high,» predicts Buceniece.
She also said Swedbank’s outlook registered in October indicated that the average inflation in 2023 may stabilise at 9%. At the beginning of next year inflation will remain close to 20%. It is expected to drop to approximately 3% only close to the end of the year.
Buceniece says global raw material prices have recovered from their spring peaks and global supply chains have improved, which will slowly become reflected in prices in Latvia in the coming months. At the same time, consumer prices will remain driven by secondary effects from the energy price and labour force cost leap. Not all businesses have managed to divert the cost increase to prices of goods and services. On top of that, a rapid increase of minimal wages is expected next year.
«Passing costs onto buyers will be even more difficult because demand is becoming more sensitive to price growth, especially in categories of prices and services that are not necessities,» said the Swedbank economist.
Buceniece said a number of measures are in the works to avoid continued growth of energy resource prices, or to at least limit the price leap. This is possible thanks to investments into Europe’s liquefied natural gas infrastructure, energy efficiency and alternative energy resources, energy austerity measures and attempts to limit speculative price leaps at various exchanges.
«It is possible we may see a slight correction of energy resource prices in the second half of next year. However, energy prices will not return to the levels observed in 2019-2020,» adds Buceniece. She also predicts: high prices of fertilizers indicate that food prices may continue going up.
According to the Swedbank economist, there are risks of inflation becoming more resilient than what the bank predicted in October, especially if global energy and food prices continue going up, the labour market stays strong and wages continue going up.
Citadele Bank economist Mārtiņš Āboliņš says there are clear signals of inflation rapidly going down in the first half of 2023. This means average inflation in Latvia may be about 9% next year.
«Energy prices in Europe and Latvia are high, but they have stabilised and are now much lower than they were at the end of summer. The pressure from prices is gradually going down in other areas as well. For example, the cost of container cargo transports between Europe and China have gone down by more than 80% since January 2022 and have returned to their previous levels. In Latvia we have observed a considerable drop in fuel prices. If concerns about energy insufficiency in Europe do not come true, next year there may be a drop in electricity and heating prices. With a positive turn of events, at the end of 2023 Latvia may see a short-term deflation. At the same time, we do not expect a return to previous energy price levels. Thanks to state support measures households and businesses do not have to pay the full price. This is why the price drop may not be reflected in lower inflation values,» explained Āboliņš.
He added: it is clear that inflation-related challenges are not even close to being over.
The service price rise in Latvia exceeds 10% and it is too soon to expect inflation levels to return to stable low level.
SEB Bank’s macroeconomic expert Dainis Gašpuitis said the main topic about inflation perspectives is what will happen with energy prices. The future dynamic of food prices will depend on that as well. This way it will be possible for the energy environment to assess energy price dynamic better. This will be reflected in food prices and elsewhere. So far the drop of prices of food materials has not been enough for it to be reflected in prices on goods on shelves. «Weather can improve or worsen harvests,» said Gašpuitis.
He also said the war in Ukraine still has a major effect.
«A more stable energy price outlook will help slow down inflation in services, which is already picking up in strength. It indicates that the price rise wave will remain in effect for some time. 2023 will start off with very high inflation, but it will gradually go down. Average inflation will be close to 10% in 2023. In certain months, especially in the second half of the year, we expect deflation. However, it is impossible to predict its length or scope. It is possible it may become stronger in 2023,» said Gašpuitis.
He mentioned that the oil market was tense this autumn. However, concerns about recession, interest rate increase and China’s blocking due to Covid-19 caused downward pressure on oil prices. Oil stores became low before winter and the situation with diesel fuel is worse than it was in 2008. This is why the cold Q1 2023 may cause serious problems. New sanctions on oil and petrol products from Russia maintain a level of uncertainty.
According to the economist, Brent price will increase in the first half of 2023. In the second half, however, the price is expected to drop. Expectations for high oil prices are related to low investments into oil and gas production. This has caused supply disruptions in many areas. Shale gas production in USA is slow to increase. There are many signs of prices above 100 USD per barrel may become the norm.
He also said the contract prices for supplies of natural gas in 2023-2024 have dropped by approximately 50%. Prices of future contracts are 4-6 times higher than usual. The same applies to electricity prices, because the border price for natural gas is the standard in most European energy prices. It is likely people will have to get used to gas and electricity prices that are three to seven times higher than usual.
Luminor Bank economist Pēteris Strautiņš said next year inflation data will be very confusing next year. He predicted that the average inflation will remain high – about 9%. However, the price level at the start and the end of the year may turn out nearly the same.
«Average inflation will come from the so-called transfer effect caused by the growing price level in 2022 in a time when inflation strongly varied between months. This means very moderate price level changed next year would mean approximately 20% inflation in January and next to no inflation in December. It is clear that we will not see completely flat price level curve next year. It will continue going up in the first half of the year. In the second, however, it will gradually go down,» said Strautiņš.
He also said that it is possible to predict with high possibility that the average price of oil and petrol products will be lower in 2023 than it was in 2022. Gas and electricity price change index will definitely feel both price fluctuations and base effect – prices of these resources varied strongly in 2022 as well. In 2023 prices of many long-use goods, including appliances and clothes, are expected to drop because prices of raw materials of transport, metallic and many other non-food products have stabilised. The drop in excessive demand caused by the pandemic has forced producers and merchants to reduce price markups.
At the same time, Strautiņš said there are concerns about next year’s inflation for food products may exceed the average. The year will begin with a high food price inflation level – approximately 30%. Food material prices remain, however, downward facing. Nevertheless, experience shows that during raw material price drop, food producers are reluctant to reduce producer prices – perhaps partially because they have to cover the losses experienced during raw material price peaks.
Also read: Latvia’s Ministry of Finance warns the country is on brink of energy crisis