In addition to that, construction costs experienced a significant jump last year, which was even faster than in the so-called fat years at the beginning of the century. It is true that currently many items of cost increase are starting to become or will soon become a thing of the past, so we can already look to the future with a little, but still, optimism.
Prices are pushed down
One of the most important aspects that determine how expensive or cheap we pay for a particular product in stores is the change in manufacturer prices. Here, the direction is largely determined by the mood of global commodity exchange traders and the associated changes in commodity prices. If the economy is going uphill, new funds are flowing into the financial market, or there is an observed or potential shortage of raw materials, then prices go up. In terms of this aspect, all three mentioned factors increased the prices of raw materials in previous years, and as a result, in Latvia we experienced the fastest jump in inflation since the nineties. Now, stock prices are driven by opposite factors. Global economic growth is slowing. Also, to a large extent, it has been able to deal with the various side effects caused by the Russian invasion of Ukraine in terms of supplies. The policy of the central banks is also oriented towards limiting inflation, thus it has become restrictive from a financially stimulating point. As a result, cash flows in commodity exchanges are slowing down, and we can already see this in the drop in raw materials, which has also already resulted in cheaper fuel, electricity and lower heat energy tariffs in Latvia. Costs are falling, and this is currently driving producer prices down as well. If we count against the corresponding months of last year, then they show smaller and smaller numbers with a plus sign, while within the months there is already a decline. It should be noted that due to the drop in the prices of energy resources, the costs for stores are also decreasing, therefore, guided by such aspects, there would be no significant basis for further price increases. Another important fact is the increase in loan interest rates, which creates an ever-increasing cost burden. This, of course, affects both producers and traders, and the winner is the one with the smallest amount of credit at the moment. At the moment, we can be happy to a certain extent that over the past years, the granting of loans to us was not as fast as in neighboring countries, and the development was largely driven by the companies’ own efforts. If it were not, then the cost burden would be higher and it would be more difficult to reduce prices in order to balance the company’s income with expenses. Be that as it may, the main message is that the prices of manufactured goods are heading in the direction of deflation. In January of this year, compared to the corresponding month of last year, the prices of manufactured goods sold on the domestic market had increased by 25.2%, but in May the increase was only 4.8%, according to the data of the Central Statistics Office. Meanwhile, in monthly terms, prices have been falling since last December. From the changes in the price index, it follows that industrialists have reduced the prices of local products by a total of 5.2% from November to May of last year.
Milk falls, meat does not
The largest item of expenditure of Latvian households is still food, therefore changes in purchase prices are very important for them. However, there is still no uniform trend here, and, for example, if we talk about livestock production, it can be seen that the purchase price of raw milk has significantly decreased, while it has generally increased for meat. It follows from the data of the Central Statistics Office that in May of this year, compared to December of last year, the average purchase price of raw milk in Latvia has decreased by 28.8% to 343.9 euros per ton. Meanwhile, for meat, it has increased by 16.4% overall. True, this has basically happened at the expense of an increase in the price of pork, while the price of other meats is close to the previous level or even decreased. In May, pork was purchased on average for 2,451.62 euros per ton, or 17.4% more expensive than last December. Meanwhile, the beef procurement price has fallen by 0.4% to 2876.11 euros per ton. If we talk about the price of meat products in stores, the main question at the moment is what will prevail in determining the price of products – a drop in the price of energy resources or an increase in the purchase price of pork. The prices of other products can also go in completely opposite directions. For example, it is clear that with drought, vegetable production becomes more expensive. Meanwhile, grain prices continue to fall on the stock exchange. For example, the price of wheat has fallen by about 13-14% in the last three months. If grain prices fall, there is reason to think that the prices of meat and eggs on the stock exchange will also fall, and this will be affected by the already mentioned drop in energy resource prices.
Will there be cheaper apartments?
The potential onset of deflation also awaits construction. According to statisticians’ calculations, in May of this year, in annual terms, construction costs have increased by 5.3%. For comparison, last May this figure was 22.3%. It should be noted that in May of this year, the price of construction increased by only 0.1%, which shows that the rapid jump in costs has become a thing of the past. Most likely in the summer, it may have already happened in June, construction has slipped into monthly deflation. If the processes continue in a similar way as before, construction will gradually become cheaper in annual terms as well. This means that the reason for the rapid jump in housing prices that occurred earlier will be gone, and the rapid increase in interest rates may reduce the flow of new money into the housing market. It is likely that this will also mean a drop in housing prices, although not too much, probably less than 10%. For it to be bigger, more significant problems than what we are currently experiencing must occur in the economy. It is true, however, that with the rapid increase in interest rates, we cannot rule them out, moreover, probably already within the next six months or a year. But for now, this is only one of the scenarios. However, returning to the existing trends, it is worth paying attention to the fact that, according to CSB data, in the first quarter of this year compared to the last three months of last year, the prices of new housing in Latvia fell by 1.8%. There is reason to believe that this decline may develop into a longer trend. Here we are talking about the price of the house itself, which is offered by the seller, but in general, the amount paid for this purchase may also become higher if the world’s big central banks maintain their course towards the increase in interest rates and the subsequent increase in the cost of loans. Namely, in the final payment of the purchase, the probable drop in the house price can be “eaten up” by the increase in loan interest rates.
2023-07-04 02:15:24
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