FM: Inflation approached the 20% level in June – Economy, finance

As expected, inflation in Latvia continued to increase in June. The data of the Central Statistics Office published on Friday, July 8, show that in June 2022, the annual inflation of consumer prices already reached 19.3%, during the month prices increased by 2.4% on average. The biggest contribution to annual inflation was provided by the increase in services related to housing (6.3 percentage points) and transport (4.2 percentage points), as well as food prices (5.7 percentage points). With some exceptions, the price increase was recorded in all groups of goods and services.

Food prices rose the most, with annual inflation reaching 18.2% in May of this year, and the inflation in individual groups was very different – ​​from 8.4% for vegetables to 58% for flour and cereals. The price increase for electricity and heat was 63.2% and 51.1% respectively, for fuel there was 60.3% inflation, and for natural gas 136.3%, while prices for solid fuel increased by 77.7%. The increase in the prices of other goods is lower, but since they include the inflationary part of the above-mentioned goods, their inflation is also gradually increasing.

There are several reasons for such a rapid increase in consumer prices, but they are mainly external. First of all, the rapid increase in prices is determined by the growing demand for energy resources (gas and oil) and supply disruptions, which started already in the autumn of last year. This makes the entire production process more expensive, and also increases the prices of housing-related services.

Second, inflation is affected by rising food prices. It must be said that the increase in food prices also has a global character. The increase in food prices has been observed since the beginning of 2021, as demand grows in the post-pandemic period, while the supply cannot keep up – due to the poor harvest of certain agricultural crops, the increase in the price of fertilizers due to the high prices of energy resources, as well as logistical disruptions. Although the European Union is fairly self-sufficient in food, producing much more than is needed for internal consumption, more expensive energy resources and mineral fertilizers, as well as food shortages in other regions of the world, raise food prices in the European Union as a whole.

Thirdly, Russia’s invasion of Ukraine intensified the negative effects of the two factors mentioned above and increased the tension in both the energy and food markets. Russia and Ukraine provide around 25% of the world’s wheat exports. In addition, Ukraine occupies one of the leading positions in the world in the export of sunflowers, corn and rapeseed. Food exports from Ukraine are hampered by hostilities. Russia, on the other hand, banned the export of cereals and sugar until the end of summer. Food export restrictions were also introduced by India, Turkey, Iran, Algeria, Indonesia and a number of other countries.

Inflation is also high in the neighboring countries of Estonia and Lithuania, where it has already exceeded the 20% level – 22% and 20.5%, respectively (Eurostat’s rapid assessment). The difference in price growth is due to the different household consumption basket and import structure, but the reasons are similar, and it is mainly due to the increase in energy prices.

Inflation is expected to continue to rise in the coming months. The Ministry of Finance is currently working on updating the forecasts of macroeconomic indicators, which will be completed in mid-August.

MINISTRY OF FINANCE

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