During the year, prices in Latvia have increased, and economists admit that this trend could continue. So far, we don’t have to worry much about that.
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It has already been reported that after Central Statistical Bureau (CSB) data, in May 2021, compared to May 2020, the average consumer price level in Latvia has increased by 2.6%.
Effect of deregulation
AS “SEB banka “economist Dainis Gašpuitis says that he has no doubt that inflation will continue to rise, but the question is the sustainability of the pace.” In the coming months, we will experience a wave of deregulation, which will free the economy. However, the release will be subject to conditions, which means that it will be some time before supply can fully assess the strength of demand. Then we will also be able to assess more clearly the impact of the pandemic on prices. In my view, there will be at least one more round of crunching to offset the cost of the new reality. Inflation the peak could be reached by the end of the year, exceeding the 3% mark in the coming months, “says Gašpuitis.
Banks also call this figure “Citadel“Economist Mārtiņš Āboliņš:” With the gradual recovery of the economy from the economic downturn caused by the Covid-19 pandemic, consumer prices in Latvia have started to rise again, but inflation in Latvia is still moderate.
In the coming months, consumer price inflation in Latvia is likely to continue rising, as world food and many other natural resource prices continue to rise. As a result, many companies are currently facing a significant increase in costs, and in April, producer price inflation in Latvia already exceeded 5%. This makes the economist think that in the second half of the summer consumer price inflation in Latvia will also exceed 3%. “
Meanwhile “Swedbank“Economist Laura Orleāne points out that the queues at the shops are starting to flourish, but people are still ready to exchange their goods for goods and services that could not be obtained due to restrictions.” supply chain problems as well as relaxed restrictions. In April, clothing and footwear were the main drivers of the price level, while in May, catering and leisure services joined the list. “Gradual deregulation and people’s willingness to pay for services and tangible goods will put upward pressure on inflation in the coming months as traders and shoppers try to catch up during the pandemic,” she said.
The category of restaurants and hotels also played an important role, thanks to the terraces opened in the beginning of May – pointing out the role of easing restrictions in headline inflation.
Swedbank Latvia’s forecast for inflation in 2021 currently reaches 1.8%, while in 2022 the rise in consumer prices will reach 3%.
What is happening in Latvia is closely related to global processes. Economists all emphasize the oil market, food trends in the world as one of the reasons for the rise in prices.
“In May, the rise in consumer prices was still mainly due to external factors, especially the rise in world oil prices. Compared to last year, fuel prices in Latvia increased by almost 30%, which accounted for more than half of May’s consumer price inflation in Latvia. activity is still significantly limited, so service prices in May were only 1.7% higher than last year, although in recent years they have grown by an average of 3% per year.
Although metal and wood prices have stabilized in recent weeks, they are very high, while oil and food prices continue to rise. As shown YEAR According to information published by the Food and Agriculture Organization, global unprocessed food prices rose by 5% in May this year and were almost 40% higher than last year. Therefore, global inflationary pressures are not over, and the rapid rise in natural resource prices, together with a very stimulating fiscal and monetary policy, is a reason to worry about rising inflation, “emphasizes Āboliņš.
Gašpuitis comments on what is happening in the oil market in more detail: the price of oil (Brent) is currently around USD 71 per barrel, driven by demand, as the restrictions related to the pandemic are eased and travel resumes. OPEC + governments are sticking to plans to gradually increase production, but demand is growing faster and US crude oil stocks are declining. The fact that the United States and Iran did not reach an agreement on Iran’s nuclear program in Vienna also contributes to the rise in prices. This means that there is good ground for further increases in oil prices in the short term. However, the price of oil has so far risen less than the prices of other raw materials. Even if the price is currently the highest since the beginning of the pandemic, the level is only slightly higher than in 2019.
In turn “Luminor“macroeconomic expert Pēteris Strautiņš notes that fuel prices in Latvia have been stable for several months now, but in the rearview mirror of annual inflation figures we can still see low oil prices at a time of great shock to the world economy.
“Transport costs are not expected to rise sharply to current levels in the coming months, futures are expected to fall moderately in the US. The US has been struck by a huge rise in used car prices, 21% higher in May than a year ago and a strong driver of inflation. In Latvia, the annual inflation of “crabs” was 4.6%, their prices were slightly lower than in February 2019.
Food prices are rising
The story of food and soft drink prices is very different, says Strautiņš. “Over the year, they have grown by 0.9%, and their contribution to headline inflation is secondary (0.33 percentage points). Unfortunately, food prices cannot be expected to moderate over the next 12 months. In addition, the wave of prices has already begun. (1.3%) was higher than in the whole of the previous year, mainly due to the sharp rise in world commodity prices, with the Food and Agriculture Organization (FAO) price index rapidly approaching two very similar historical records just before and after the global crisis. In stock exchanges, almost everything is more expensive than a year ago, but not everything is expensive in relation to the curves of the distant past, “emphasizes Strautiņš.
As an example, he cites the price of lean pork – it has risen almost 2.5 times during the year – and is at an all-time high, except for a brief moment in 2014. Butter prices have risen by 50% since last spring, but are a third cheaper than in the famous butter bubble in 2017, when the prices of this product in stores really shocked buyers. Wheat is almost twice as expensive as at the lowest point of the decade in the summer of 2016, but still a quarter cheaper than at the “peak” of 2012.
Many will complain
“In 2007-2008, the situation in grocery stores was really dramatic, then food inflation remained above 20% for six months. At that time, our country was overheating, wage growth temporarily exceeded 30%, so we can not only blame global processes. But even In 2011, when the Latvian economy was very “cold”, food inflation, which was hit by stock exchanges, reached 11.3%, this time without such a sharp rise in food prices. The share of processing and trade-related costs has risen as income levels have risen. “Food expenditures will not be so unpleasant, because food expenditures make up a declining part of the average family budget, they have decreased and account for about a fifth of total spending.
However, in his opinion, it can be hoped that the impact of global troubles will be mitigated by growing competition in retail, so the news is that “Lidl“has announced the recruitment of several hundred additional staff.
Gašpuitis also emphasizes that world food prices are literally rising. In Latvia, food occupies a sufficiently significant share in the consumer basket – 25.6%, due to which these changes will be felt by a large part of the society. Prices will continue to rise in services as well. It continues to be tirelessly driven by wage growth, which will be passed on to the final consumer as far as possible.
How much longer?
Swedbank economist Laura Orleāne outlines the situation in the Eurozone as a whole. “Inflation reached 2% last month, the price stability threshold set by the ECB. Number of headlines on inflation European Newspapers are growing faster than prices themselves, but the rise in prices is still largely due to rising energy prices (+13.1). Core inflation, which excludes always volatile energy and food prices, was below 1% in the region last month. The re-opening of the economy is causing inflation to rise all over the world. In the United States, consumer prices rose by 4.2% in April, with price growth likely to exceed 4% in May. Economic incentives, the easing of restrictions and the savings released are fueling the debate on how long the rapid growth will continue. However, just like in Latvia, global inflation is part of the post-pandemic opening. “The growth rate will stabilize and such a rapid rise in prices is not expected in the medium term,” the economist estimates.
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