July 8, 2022.
The information was prepared by Pēteris Strautiņš, Luminor.
In June, the annual inflation exceeded the highest level of this century, which was recorded in the spring of 2008. Precedents for the current rate of price increases must now be traced back to the dark nineties. In June, prices were 19.3% higher than a year ago, but compared to May they increased by 2.4%. Housing, transport and food costs accounted for 84% of the total damage to purchasing power. The role of other product groups in increasing inflation is currently relatively small, although the price increase in some of them is rapid, such as in hotels and restaurants – by 14.1%.
The main culprit behind this year’s inflation explosion is global commodity markets. Since May, their prices have been falling rapidly. However, all the previous cost increases have not yet been fully reflected in the consumer price index. The heat tariffs of some municipalities have already been increased, but another significant rise in annual inflation is expected at the moment when Riga Heat will raise the tariffs. Currency markets are also a risk factor. The exchange rate of the euro against the dollar has reached its lowest point in almost 20 years, as the gap between the economic dynamics of the US and the eurozone deepens. The risk of recession is growing in the Eurozone, but the US economy is still warm, and the labor market can even be called hot. Therefore, the US central bank will have to deal with cooling the economy, while the projected future level of interest rates in the Eurozone is already sliding down.
The prices of certain important goods are already starting to decrease. The average fuel price in July will be lower than in June. Fuel became more expensive in the first half of the year, as the price of oil rose sharply since the beginning of December (when a barrel of Brent cost 61 euros). In addition, in April, the fuel market began to live its life, with the breakdown of the normal relationship between the prices of oil and its products, but now it is recovering. As oil also becomes cheaper (from 117 euros per barrel on June 13 to 103 euros today), fuel prices will drop below the threshold of two euros.
The impact of raw material costs on inflation will be mixed in the second half of the year. If global markets are already cooling rapidly, then regional energy markets are going crazy. Electricity prices in the Baltics fluctuate around 300 euros per MWh, which is about ten times more than in the summer months in the “good old days”. The price of gas in Europe is 167 euros per MWh. Dividing this number by 100, we get the approximate price of a cubic meter of gas in euros, which, moreover, can be much higher for end consumers. Even the price with delivery after one year, which until now was little affected by the jumps in the price of “fast” gas, is very high, or 136 euros, but the two-year price (89 euros) far exceeds the previous records.
Another important nuance – Latvian residents consume a lot of food products whose prices are still high on the stock exchanges, for example milk. The overall S&P GSCI food index has fallen by 16.9% from its record high on May 17 in euro terms. The prices of dairy products have decreased much less. The price of skimmed milk powder has dropped from 4,250 euros per ton at the end of March to 3,945 euros per ton, while the price of butter has fallen from 7,525 euros per ton on April 4 to 7,300 euros at present. The prices of rice and corn have been quite moderate this year, but Latvia is the land of wheat and rye.
If food price forecasts are already starting to look hopeful, the same cannot be said for energy, unfortunately. The scourge of electricity and gas prices calls into question whether the 350 million euros allocated to support households in the next heating season will be enough, which is less than 1% of this year’s rapidly growing Latvian GDP in monetary terms. Money is more than ever – this famous saying is becoming more and more true. Heat prices will not be prohibitively high for everyone. In cities that heat with wood chips, the heating price next season will be around 80 euros per MWh – the highest level ever, but the purchasing power of heat will still be stronger than 10 years ago, because wages have grown more. Unfortunately, the ratio of electricity prices and wages will go beyond any historical “frames”, and help will most likely be needed, and not only for the poor.
How can consumers themselves overcome the effects of price increases? You can try to reduce the impact of inflation by buying goods at an advantageous time. Many Latvian residents, companies and even municipalities have unwittingly become speculators in the raw materials market. Pellet producers are reporting increased demand as heating plant owners try to hedge against even higher prices in the future. The heads of local governments were scratching their heads over whether to buy wood chips now or during the heating season. It is very likely that those who wait will be right, because woodchip producers are currently working with an unusually high capacity for the summer season, so there may be surpluses later. It is clear that there is no longer any point in stockpiling long-term food, even though it is a popular topic of conversation, and the purchase of fuel should be delayed rather than rushed.
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