Annual inflation rose to 2.7% in June, down a tenth of a month a month earlier. Compared to the previous month, the price level in June increased by 0.3%. There was still 0.2% deflation in February, so the change has been rapid.
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Unfortunately, they will continue. Annual inflation has risen even higher in July as rising gas prices “fall” in the consumer basket. It is measurable in tens of percent, depending on the product and its consumption in each household, but nothing very dramatic has happened, there is a return to pre-pandemic price levels, with nuances. In June of this year, gas for households was 20.6% cheaper than two years ago.
After July, sharp price jumps are not expected for the main product groups. It is possible that prices will increase for electronics and household appliances. Electronics manufacturers are raising prices as average component purchase costs have risen by about a tenth. Home appliance manufacturers will have to compensate for the cost of both electronics and metal. However, the prices of these products have been rather declining for a long time, especially in terms of quality and performance. Rising prices for refrigerators and televisions would not cause a social crisis.
The risk of a sharp rise in food prices, if any, would be taken seriously. Inguna Gulbe, head of the Agricultural Market Promotion Center, said on June 5 that a “sharp and shocking” rise in food prices was expected, citing rising energy and wage costs. Such a message creates unnecessary stress. Energy prices are rising relative to the lowest point of the pandemic, but not high relative to historical levels. Rising wages are making food more expensive, but at the same time improving its purchasing power.
On the other hand, the prices of internationally traded food raw materials are generally quite high, but for most products they are not at record levels. In addition, some sharply rising prices are already being corrected. For example, wheat prices have fluctuated slightly below € 200 per tonne for several years and have been remarkably stable, rising in August last year to almost € 260 per tonne by the end of April, but returning to € 200 in May, and at this moment.
Prices of skimmed milk powder are high against the background of the last seven years, but in 2013-2014 they were sometimes even a third higher. There is one important product that is very expensive at the moment – it is pork, more expensive for a short time it was only in 2014. In turn, sugar prices can be called averages against the background of the last decade.
The UN Food and Agriculture Organization (FAO) index summarizing the situation on world markets is close to the average level of 2010-2014, as well as the 2008 price peak. However, the income of the Latvian population has grown significantly since then, so this increase should not lead to a crisis in food availability. In addition, the FAO index fell slightly in June compared to May, when it was 40% higher than a year ago, which was the lowest point since the beginning of 2016.
Why do stock prices matter? This affects food prices in stores through rising costs and the so-called connected container principle. Rising grain prices on the world market do not mean that grain growers’ costs are rising, but they have more favorable sales opportunities elsewhere. The increase in the prices of milk powder does not mean that the prices of milk powder in stores will increase – consumers are not interested in this product, but processors of fresh milk may appear more profitable alternative to processing raw milk into consumer products. For pork producers, on the other hand, rising grain prices have a direct and significant impact on costs.
Latvia and other high-income countries have thick buffers between food exchange prices and store prices. Much of the cost is local and depends on local wage levels. In poor countries, many people can only afford raw materials – grain, flour, oil, etc., and then prepare them themselves, so fluctuations in stock prices can be devastating for them. In Latvia, grain prices make up only about one tenth of bread prices.
Therefore, this is the right moment to repeat the ingenious thesis of the Latvian political classic: “We must be afraid not of high expenses, but of low incomes”. That is the right strategy right now. There is a huge demand in export markets and an opportunity for Latvian companies to earn more. In the near future, there will also be a rapid increase in activity in the labor market, so there will be an opportunity to earn the majority of the population.
All that remains is to change the ladder of world value-added with the help of changing the structure of the Latvian economy, or, as economists tend to say cynically, to approach the top of the food chain.
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