News about falling product prices can be evaluated as both good and bad. On the one hand, it becomes possible to purchase goods at more reasonable prices than before, while on the other hand, company revenues fall, and if the same does not happen with cost items, then the company may find itself in financial problems. In addition, the drop in producer prices manifests itself in moments when the previous price bubbles burst and the economy threatens to be hit by a crisis, but it would be premature to talk about the latter at the moment, although it should not be forgotten.
Good news for households
From the point of view of an ordinary buyer, the good news is that deflation has begun to manifest itself in Latvian food production as well. True, for now it is very modest and has more statistical significance than a tangible impact on buyers’ wallets, because producer prices in the food industry in March and April, compared to the previous month, decreased by 0.2%. Therefore, it does not leave a noticeable impact on the overall numbers after the price jump that took place last fall. It is true, however, that we have certain segments in our stores where the price drop has been really noticeable in recent months, and for now it is attributable to basic dairy products. The drop was around 3-4%, which may seem very little to farmers, when the purchase price of milk has fallen by a third or more. Therefore, for the time being, we cannot rule out the possibility that in the long supply chain from the cow’s bean to the store shelf, someone may earn more than before and, as you can see, it is not a farmer.
The question is also worth analyzing in the context of the overall cost and inflation level, because a situation arises when, when the crisis comes, some become poorer, while others may get additional profit. The problem is not only in moral aspects, but in the increasingly unbalanced national economy, and while even within the cycle of one commodity some have the opportunity to become richer, while the opposite happens to others, the foundations of the overall national economy also become shakier, and in the end everyone can turn out to be the victim. However, if we talk about the impact of producer prices on the lives of consumers, there is reason to think that without the price of milk, they can shrink in several basic food product groups. It is largely determined by global trends, which will also affect the cost of production in both agriculture and the food industry. In particular, this can be applied to grains.
As Ingūna Gulbe, an expert on agricultural market trends and prices, head of the Agricultural Market Promotion Department of the Institute of Agricultural Resources and Economics, explained, we do not set grain prices ourselves in Latvia. How much the production of bread, buns and other food products related to this industry costs, directly related to grain prices, is determined by world developments. And they are currently very favorable for Latvian consumers.
This is also reflected to some extent by the FAO price indices of the World Food and Agriculture Organization. For example, this index for grain prices was 20% lower in April this year than in the corresponding month last year, according to the information available on the organization’s website. It should be noted that grain production is a raw material not only for flour and bread products, as well as for confectionery, but also for livestock production. A lower price index value is found in all major food commodity categories, except for sugar, so the overall recent trend is towards lower global food prices. On the other hand, what Latvian residents could expect in the coming months is probably a drop in the price of bread and meat products. Edible oils could have a similar trend, with the exception of olive oil, whose shortage and price increase may already be due to the drought in Spain. In any case, the price of olive oil in Latvia has increased.
Different directions and speeds
While the average buyer, at least initially, may be happy that prices will drop, from the point of view of entrepreneurs, the assessment could be different. For them, a fall in the sale price means less money in the company’s coffers, and therefore potentially less money to pay bills, pay employees and deal with liabilities to banks that have increased due to changes in interest rates. Thus, the onset of deeper deflation does not bode well for workers either. In any case, they also need higher wages to cope with the currently significantly higher loan payments, and have to pay significantly more for the same basket of goods and services than a year ago. Therefore, a situation is currently developing in the economy where everyone is waiting for a decrease in inflation, but at the same time there are attempts to increase prices in some segments in order to earn something extra and not to end up with a sharp drop in income. Thus, it can be said that the direction of prices both in the world and in Latvia is multi-layered and these price layers can move both at different speeds and in completely opposite directions.
The overall trend is towards a decrease in prices, which is happening month-on-month, although, compared to the corresponding period of the previous year, producer prices are still positive, albeit rapidly decreasing. For example, for the manufacturing industry as a whole, in April compared to last year’s April, producer prices have grown by 3.4%, while in March the growth rate still reached 9.7%. Thus, even in annual terms, production is moving rapidly towards deflation, and in this case the most important thing is that the decline does not develop too quickly and for a long time. Currently, we are already facing a decline in production output in the manufacturing industry. If this is accompanied by a long-term drop in prices, the economy of Latvia as a whole and the majority of working people individually will face a very big financial problem. In fact, if such a decline were to last, it would mean that both Latvia and the world are on a safe, but unpleasant path towards a new financial crisis.
2023-05-24 02:15:19
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