Mārtiņš Āboliņš, an economist at Citadele Bank, told LETA that with the gradual recovery 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. However, in the coming months, consumer prices in Latvia are likely to continue to rise, as world food and many other natural resource prices continue to rise.
According to Āboliņš’s forecast, annual inflation in Latvia will exceed 3% in the second half of the summer.
“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, therefore 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, “noted.
He also noted that although metal and wood prices have stabilized in recent weeks, they are very high, while oil and food prices continue to rise. According to the Food and Agriculture Organization of the United Nations, unprocessed food prices rose by 5% in May this year, almost 40% higher than a year ago. Therefore, global inflationary pressures are not over, and the sharp rise in natural resource prices, combined with very accommodative fiscal and monetary policies, is a cause for concern about rising inflation.
“In my opinion, it is currently difficult to answer convincingly whether this is temporary inflation or whether global inflation is expected to return. The current rise in inflation in financial markets is still seen as rather temporary, although speculative financial positions in natural resource markets have risen, investors’ willingness to protect themselves from possible price rises, production and supply chains should also return to normal over time and supply to catch up, while unemployment is still higher than before the Covid-19 crisis, which should curb wage growth, but without strong wage growth inflation is unlikely, “explained Clover.
He noted that also in Latvia, although the average salary has grown by 9.5% in the first quarter of this year, the salary fund growth was only 1%. In March and April, income was supplemented by one-off benefits for families with children, as well as pensioners, but such support cannot be continued and it is necessary to think about reducing the budget deficit. There are many other countries in a similar situation, whose debt level is significantly higher than in Latvia.
SEB banka’s macroeconomic expert Dainis Gašpuitis told LETA that inflation would continue to rise, but a more topical issue was the sustainability of the pace.
“In the coming months, we will see a wave of deregulation that will free up the economy. However, the release will be conditional, which means that it will take some time for supply to assess the strength of demand more fully. Then we can assess the impact of the pandemic on prices more clearly. “Inflation could follow with at least one round to offset the costs of the new reality. Inflation could peak at the end of the year, exceeding the 3% mark in the coming months,” said Gašpuitis.
He noted that the rise in consumer prices is driven by rising energy prices. The price of oil is currently around $ 71 a barrel, driven by demand as pandemic restrictions 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.
Gašpuitis also noted that a marked deterioration in the delivery time of goods is also putting increasing pressure on commodity price inflation. Meanwhile, world food prices are literally rising. The UN World Food Price Index rose 40% in May. This is due to various factors, such as the drought in Brazil, increased demand for cereals and soybeans in China, and growing demand for vegetable oils for biodiesel production. This will put the greatest inflationary pressure on developing countries, where raw materials are used more for consumption, while in developed countries food raw materials account for a small share of the final price. “In our case, food plays a significant role in the consumer basket – 25.6%, which will make this change felt by a large part of society. Prices will continue to rise in services as well. added.
SEB banka’s macroeconomic expert also added that we are in an interesting situation when central banks’ understanding of what transient inflation is is being tested. “We have an unusual cocktail of seasonal, fiscal and monetary policy effects, rising energy and food prices. Inflation in the eurozone will rise from 1.9% in May to just over 3%. The European Central Bank expects inflation to fall rapidly, but the higher it will be. “At present, most central bankers around the world are convinced that inflation is temporary,” said Gašpuitis.
Luminot economist Pēteris Strautiņš also told LETA that annual inflation in Latvia will continue to rise, albeit in smaller steps, reaching its highest level at the turn of the year.
“But for the time being, there is not much to worry about the rise in prices, the rise of 2.6% must be seen in conjunction with the fall of 0.6% in May last year. This means that prices have risen by only about a percentage point per year on average for a couple of years. The years have been a period of price stability, in which the effects of the pandemic have blurred the air, “said Strautiņš.
Swedbank economist Laura Orleāne told LETA that the inflation recorded in May reflected previously expressed concerns about the continuation of the sharp rise in prices, but the sharp rise in prices is a logical part of the re-opening of the economy.
“The re-opening of economies is causing inflation to rise around the world,” Orlane added, noting that economic stimulus, easing restrictions and releasing savings are fueling a debate on how long the rapid rise will continue, but, like in Latvia, global inflation is part of post-pandemic opening – growth rates will stabilize and such a rapid rise in prices is not expected in the medium term.
She noted that queues at stores are starting to flourish, but people are still ready to exchange for goods and services that could not be obtained due to restrictions. So far, the sharp rise in inflation has reflected last year’s fall in price levels, rising global commodity prices, supply chain problems and easing restrictions. In April, clothing and footwear were the main drivers of the price level, while in May, catering and leisure services joined the list. The phasing out of restrictions and the willingness of citizens to pay for services and tangible goods will put upward pressure on inflation in the coming months as traders and buyers try to catch up during the pandemic.
According to Swedbank’s forecast, in 2021 the average annual inflation in Latvia will be 1.8%, while in 2022 the increase in the consumer price level will reach 3%.
It has already been reported that consumer prices in Latvia have increased by 0.5% in May this year compared to April, but during the year – in May this year compared to May 2020 – consumer prices have increased by 2.6%. At the same time, the 12-month average consumer price level increased by 0.1% in May compared to the previous 12 months.
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