FM: Price increase for food and energy resources in July raises inflation to 21.5% – Economy, finance

The latest data from the Central Statistical Office confirm that inflation continues to accelerate, following the trends of other European Union countries. In July 2022, the consumer price index increased by 2.2% compared to June, which is very high inflation within one month. Disregarding the data of January of this year, when consumer prices remained unchanged on a monthly basis, it can be concluded that the price level on a monthly basis has continuously increased, starting from January 2021, or 19 months in a row. In annual terms, the price increase was even more pronounced, increasing by 21.5%, which is the fastest price increase in the last 25 years. Even faster inflation was recorded in Latvia only in the mid-90s of the last century. Taking into account the high food and gas prices in the world, the expected increase in heat energy tariffs in the coming months in several municipalities, including Riga, it is expected that inflation will likely increase further in the coming months. A slowdown in consumer price growth could be expected only at the end of this year.

Finance Minister Jānis Reirs: “Aware of the rapid rise in inflation, the government is actively looking for solutions, and tomorrow at the meeting of the Cabinet of Ministers we will decide on a broad support program for residents to help pay for heat during the heating season and reduce the impact of price increases.”

In July of this year, the second highest inflation in the Eurozone was recorded in Latvia. A higher increase in consumer prices was found only in Estonia, where prices increased by 22.7% compared to July last year. It should be noted that the issue of inflation is relevant not only in the Baltic States or Europe as a whole, but all over the world. In July of this year, the average annual inflation in the eurozone was 8.9%, which is the highest price increase since the establishment of the eurozone, i.e. since 1999. Inflation in Turkey also reached its highest level this century, +79.6.5% in annual terms. Inflation in the United Kingdom and the United States was 9.4% and 9.1% respectively in June this year, which is the highest rate in the last 40 years. It must be concluded that the rise in consumer prices is comprehensive and fixed in all regions of the world. Price differences between countries are determined by a different household consumption basket, import structure, policies implemented by the government and the central bank.

With a few exceptions, all goods and services rose in price. In July of this year, the biggest contribution to the annual inflation was determined by the increase in the prices of food and non-alcoholic beverages by 24.3% compared to the corresponding month last year, thus explaining 6.2 percentage points or more than a quarter of the fixed inflation.

Availability of food products in certain regions of the world and rising prices are one of the most pressing topics in the context of inflation around the world. After Russia and Ukraine agreed on the export of grain from Ukrainian ports, world prices of grain and oil fell. According to the data of the UN Food and Agriculture Organization, the raw food price index decreased by 8.6% in July this year compared to June. The decline of the index was ensured by the prices of grains and oils. However, the raw food price index is still at a very high level – 13.1% higher than in July last year. Russia and Ukraine are among the largest producers and exporters of grain and oil in the world, so food prices are volatile in a war and could rise again. In addition, it should be noted that due to the dry summer in Europe, this year’s harvest is at risk. On the other hand, high gas prices made the production of mineral fertilizers more expensive, which will affect food prices next year. Consequently, there are still risks that could increase food prices.

A significant contribution to the increase in consumer prices in July of this year was also provided by the increase in the price of housing-related services by 83.8%, which was affected by the increase in the prices of electricity, gas, thermal energy, and solid fuel. After the revision of gas tariffs from July 1, the price of gas became 151% more expensive than in the corresponding month of last year. Taking into account that the demand for firewood and pellets increased significantly, the prices of solid fuel rose sharply in July of this year, or by 99.8%, compared to July of last year. Electricity became more expensive on an annual basis by 78.5%. However, the increase will increase further in the coming months, as electricity tariffs are expected to rise in the fall. Thermal energy was more expensive by 59.3%, which was largely influenced by the more expensive price of natural gas. Taking into account that the heating season is approaching, several municipalities plan to increase the heat energy tariff, thus the price of heat energy will increase even more in the coming months.

Although the price of fuel was 51.5% more expensive in July this year than in July last year, it is currently the only consumer product whose price dynamics can slightly improve the mood. Compared to June of this year, the price of fuel has decreased by 3.9%. The drop in fuel prices continued in the first week of August, following the drop in oil prices in world markets. Considering the weak economic growth data for the second quarter of this year, both in the USA, in Europe, and also in China, there are fears that the development of the world economy could slow down. On the other hand, at the beginning of August this year, OPEC countries agreed to increase oil production from September this year. Against this background, the price of oil continues to fall for several weeks in a row. At the beginning of August Brent Mark crude reached $94 per barrel, or the level of prices that existed before the Russian invasion of Ukraine, when the price of oil began to rise sharply.

MINISTRY OF FINANCE

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