Banking analysts: Inflation in Latvia may exceed 6% next year

He stated that consumer price inflation in Latvia is currently limited by the relatively low rise in service prices, which increased by only 2.5% in September compared to last year. But here, too, inflation will rise faster. Registered unemployment in Latvia fell below 6% in September, the number of vacancies is growing, and the government plans to allocate more than 700 million euros to next year’s state budget in addition to expenditures.-

“Therefore, inflation in Latvia next year is likely to be at least 4%, but price growth in Latvia will be highly dependent on global food and energy prices. Current electricity and natural gas prices do not seem sustainable, and such sharp increases are usually followed by falls. However, if the prices of electricity and natural gas in Europe do not decrease significantly in the coming weeks and months, then it cannot be ruled out that inflation in Latvia may exceed 10% in some months next year and 6% in a year, ”Āboliņš predicted.

SEB banka economist Dainis Gašpuitis also predicted that inflation would soon exceed the 5% mark and approach 6%. Currently, the biggest hopes are for warm, rainy and windy winters and a more moderate spread of the virus, which can ease energy price pressures and normalize commodity flows, thus cooling the jump in inflation.

Gašpuitis pointed out that household budgets are having a very challenging time, when the most sensitive sections of expenditure – housing, transport and food – are experiencing very rapid growth, the culmination of which is yet to come.

The global shortage of many commodities is leading to higher prices, but central banks are “keeping the mantra that inflation is short-lived,” although it is becoming increasingly difficult to sell the message, according to Gaispuitis.

The question of how long it will take for inflation to fall again cannot be answered, but he believes that some relief could follow in the second quarter of next year.

However, higher inflation could continue even after that, because the set of factors forming price pressures is so wide that normalization will take a long time, cutting inflation expectations, Gašpuitis said.

He added that the OECD has also raised its inflation forecast for the G20, expecting an increase of 3.7% this year and 3.9% in 2022. Higher commodity prices and global supply costs are driving inflation in the G20 by about 1.5 percentage points. The OECD points out that the inflation rate will decrease until the end of 2022, but will remain above the pre-pandemic level.

The economist of SEB banka explained that energy prices also create the greatest uncertainty. The price of Brent oil has risen to its highest level since 2018, but gas and electricity prices are reaching records. As a result, energy has become a particularly pressing issue, with China reporting risks of production disruption, and soaring electricity and gas prices in Europe and the United Kingdom are becoming an increasingly pressing issue not only for businesses but also for households.

Dainis Gašpuitis, Also an economist at SEB banka

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“Therefore, also in the case of Latvia, primary support measures should be provided to socially vulnerable groups, as the increase in the expenditure of these households will be much higher than the consumer price index. For workers, although rising inflation will cause unnecessary headaches, it will be better managed. The situation in the labor market will continue to improve moderately, with wages also rising. “

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Pēteris Strautiņš, an economist at Luminor Bank, said that a further rise in inflation is inevitable in the near future. Forecasts are being raised, no one can promise that annual inflation in the winter will not reach the current level of neighboring countries, but next year’s average inflation could be around 4%.

Strautiņš explained that annual inflation reached 4.8% in September, but the average inflation of the past two years is still very moderate or 2.25%. This indicator must also be taken into account, as there was deflation last autumn, but wage growth continued. Before the current price jump in Latvia, there was a period of price stability, which began before the pandemic – in the spring of 2019, and continued until the beginning of this year, Strautiņš reminded.

He noted that energy prices will continue to rise and that European gas and electricity markets are going crazy. Two mainly energy-dependent expenditure items – housing and transport – accounted for more than half of annual inflation, or 2.8 percentage points. A year ago, these items reduced the price level by 1.3%. The previously forecast rise in food prices is also taking place, but it is not and will not be the main driver of inflation, food in September cost 3.8% more than a year ago.

Strautiņš emphasized that inflation in Latvia is still “pleasantly mild” against the background of the Baltic neighbors – in Estonia the price increase has reached 6.6%, but in Lithuania 6.3%. Higher inflation in neighboring countries indicates additional risks posed by the consumer and housing market boom, which will sooner or later reach Latvia as well. Unlike the rest of the Baltics, Latvia has not yet achieved the highest annual inflation since the housing market bubble – in May and June 2011, inflation was 5% and 4.8%, but this will inevitably happen, Strautiņš predicted.

Pēteris Strautiņš, economist at Luminor Bank

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“The rise in inflation in Latvia and throughout Europe is partly an accident – a cold last winter, weak winds and precipitation, a huge global demand for goods, probably also the result of Russian policy. To some extent, however, this is the result of energy policy. The EU aims to drastically reduce greenhouse gas emissions, which has contributed to the closure of coal-fired power stations and the rise in the price of emission rights. “

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The economist added that no one wanted such a big rise in prices so fast, because it could create political difficulties for the “saviors of the world”. The harshest manifestations of the price shock will be short-lived.

He stressed that in September, gas and heat prices were still below the peak of the last decade in 2012, when wages and pensions were much lower. In addition, for district heating the difference is significant – one sixth. Unfortunately, the rise in prices will continue and electricity prices for households are already the highest ever, but since September 2012 they have also grown slower than wages, the price of electricity for households has increased by 46.4% in nine years.

Last year, according to the Central Statistical Bureau, the average household expenditure on energy consumed in dwellings accounted for 9.1% of the total consumption basket. Households returned 3.7% of their total expenditure on heat, 3.1% on electricity, 1.2% on solid fuels (firewood and pellets) and 1.1% on gas. For those who consume the relevant heat source – centrally heated water, gas or firewood, the respective expenditure item accounted for a much larger share of expenditure, especially if the household income is relatively small, Strautiņš pointed out.

According to him, there are two basic solutions – reduction of energy costs through efficiency and change of primary resources, as well as increase of income, which will ensure that Latvians will not be among those who experience great discomfort in times of rising energy prices. Changing primary energy sources means, first and foremost, replacing gas with heating with bioenergy. However, the transition from internal combustion engines to electric cars will also be very helpful, which means both the transition from fossil to renewable resources (their share of electricity in the Baltic and Nordic countries is high) and the reduction of energy consumption by about three times.

In Strautiņš’s opinion, higher electricity plant capacities can be reduced in the region, as well as European-wide solutions – increasing the capacity of continental-wide electricity networks, as well as higher solar energy capacities, which would save the situation this year when the wind is weak.

Pēteris Strautiņš, economist at Luminor Bank

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“The change in trends in the Chinese housing market also gives hope to those who are tired of rising prices. A sharp reduction in exaggerated construction would cool overall global demand. The immediate impact on economic growth would be detrimental, but it would also literally destroy energy and metal prices. “

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If it is decided to support energy consumers, then in the opinion of the economist the recommended type of support is targeted benefits. They will ensure that people can pay their bills, but at the same time will remain an incentive to invest in energy switching and / or housing efficiency.

“When deciding on support, the dilemma may arise – how not to discriminate against those who have been prudent and have largely protected themselves from rising energy prices. If a person heats a home with pellets or firewood, but uses electricity only for LED bulbs and efficient devices, then he can look at the current turmoil completely calmly, ”added Strautiņš.

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