Oilers can rub their hands for now
One of the main risks for the further reduction of inflation is the rising fuel prices, which are connected with the currently observed jump in oil prices on world exchanges. This is known to be related to the findings of the International Energy Agency that the demand for “black gold” may reach record levels this year. It should be noted that this is happening despite both increasingly efficient internal combustion engines, which reduce fuel consumption, and the fact that intensive work is being done to replace oil with other types of fuel. It was heard that in June the average oil consumption reached around 103 million barrels per day, which is quite a lot. In the previous years before the covid pandemic, when consumption already seemed to have reached the ceiling, it was around 100 million barrels per day, and with a downward trend. The recovery of the Chinese economy from the covid pandemic, as well as the more active travel of the planet’s inhabitants even after the pandemic, have changed this trend. True, these are to some extent extraordinary factors that contributed to the jump in both fuel consumption and prices, and they will be destined to pass. However, regarding the creation of inflation in the coming months, they might have already done their “black work”. In late July and early August, the price of Brent North Sea crude oil had breached the $85 mark again, where it was last seen during a brief rise in early April, when several Arab countries announced production cuts. Meanwhile, fuel prices in Latvia have already increased significantly again, for example, the price of diesel fuel is at the level of 1.60 euros per liter. True, the good news is that the increase in oil consumption has not caused a price shock and black gold is currently cheaper than before the war in Ukraine. Among the bad news is the rise in the price of natural gas. In recent days, the price of “blue fuel” is around 40 euros per megawatt hour (MWh), as opposed to around 25 euros per MWh a month earlier. Here, the reasons for the increase are also similar to the case of oil – “extraordinary” and temporary. In other words, the price grew, experiencing a “technical correction” after a sharp fall earlier, which was accompanied to some extent by an increase in investor activity in financial markets, including global commodity exchanges. Also favorable to the increase was the news that workers of liquefied gas (LNG) plants and “Woodside Energy Group” natural gas extraction in Australia have voted to hold a strike. The strike could hamper LNG exports from Australia, reducing the amount of gas available on the market. However, strikes are not traditionally considered a long-term phenomenon, and the market balance should be restored. This, in turn, may mean that the price of gas will decrease again.
Climb “broken”
Although the news from the energy resources market is not the most encouraging, it is unlikely to leave a lasting impact. At the moment, it seems that the price increases observed there will contribute to deflation-oriented processes stalling for a few months, but no more. The global trend is aimed at the fact that consumer price indices both in the world and here in Latvia should decrease. There could be at least three reasons for this. One of them is related to the fact that after the sharp jump in prices, which is related to the price shock caused by the Russian invasion of Ukraine, the situation in the world commodity exchanges has generally calmed down. Currently, price changes are generally dictated not by the fact that our eastern neighbor can blackmail someone, but by economic demand and supply. Also, the already mentioned rise in the price of oil is largely explained by the very high demand dictated by the still relatively active economy, despite the high interest rates of the central banks, which make loans more expensive, thus slowing down consumption. However, when it comes to the monetary policy implemented by the central banks in terms of lending rates, we can come to the conclusion that the seeds that until now contributed to the formation of the consumption bubble, despite the high prices, have been largely “overturned”. The issuance of loans has slowed down, and deposit rates in commercial banks have become higher. Therefore, it can be said that both in Europe and in Latvia, at least some of the people who were planning to make large purchases that needed to take out loans have decided to wait. That is, the down payment required for the purchase continues to sit in the bank, earning interest income, until it becomes clear that the rise in interest rates has ended or, even better, rates have started to decrease. This dampens aggregate demand and curbs inflation. Aggregate global demand can also be dampened and living standards made cheaper by concerns about China’s economic under-growth. News that the world’s second-largest economy is not doing as well as expected could soon serve as a “sell” signal for commodity traders, when oil, metals and other commodities may fall in price. Of course, an ordinary citizen of Latvia has nothing to do with many of them on a daily basis, but it should be taken into account that one event leads to the next. Namely, high interest rates and an expected decrease in demand are not favorable for the general investment microclimate, and this would most likely cause the prices of raw materials related to the everyday life of most Latvians to decrease. Provided that one of them is not in deficit. It can be added here that the market has already “digested” both the explosion of the Kakhovka dam and Russia’s threat to attack grain ships in the Black Sea. Thus, for example, the price of wheat, after an initial rise, gradually returns to its previous downward trend.
Not at the beginning, not at the end
In Latvia, we often complain that we are experiencing the highest inflation in Europe, including that we are the leaders among the Baltic states. We can say with absolute certainty that our inflation index is very often at the top of Europe due to the relatively low income of the population, and therefore a relatively high proportion of expenses for food and utility payments. But in reality, our position among the top inflation countries is variable. During the summer and autumn of last year, when inflation reached the highest points in the world, we lagged behind both Lithuania and Estonia, as well as Hungary, in terms of price growth rates. President Orbán’s friendship with the Kremlin has not brought much prosperity to the country itself. Currently, at 6.4% annual inflation in the Baltics, we are one percentage point behind Lithuania and on the same level as Estonia. Meanwhile, for the already mentioned Hungary, annual inflation was 17.6% in July, according to “Tradingeconomics.com” data. In terms of price growth rates, Latvia is currently slower than Central European countries such as Poland and the Czech Republic, where annual inflation in July was 10.8% and 8.8%, respectively. Also, in terms of the growth rate of the cost of living, Finland is ahead of our country by a tenth of a percentage point, while in Sweden the annual inflation rate was 9.3% in July. Meanwhile, the annual inflation rate in Germany is 0.2 percentage points lower than in Latvia. On the other hand, annual inflation in France was 4.3% in July, and in Spain – 2.3%. From the figures just described, we can conclude that many European countries still have quite a lot of money to continue “fueling” the rise in consumer prices, which to a certain extent can negatively affect inflation reduction processes in Latvia.
2023-08-17 02:15:12
#Inflation #heat
