Navigating the Current State of the Latvian Economy: Will Inflation and Prices Rise?

This year in the Latvian economy can again be marked as a time to overcome difficulties rather than enjoying life and growing easily. However, in one aspect, life is getting easier – the reduction in the prices of raw materials, which began at the end of last year, is reaching consumers. A favorable effect on consumer prices manifests itself gradually, it is reduced by expensively purchased stocks, the pricing policy of companies, in other words, inertia. The increase in production costs pushed up consumer prices very quickly, but consumers are feeling the reduction in production costs much more gradually. The latest news from commodity markets is no longer so positive.

Will inflation and prices rise?

The outlook for the cost of living has indeed worsened this year, but there is no cause for great alarm. An overview of the main events in the commodity markets, their potential impact on Latvia and prices.

• Events in the oil market have received the most attention this year, especially as they are linked to dramatic geopolitical developments. Starting the year at $76 per barrel, oil prices briefly exceeded $90 and remain close to that level. However, transport costs in Latvia have a much more direct impact on fuel prices than oil prices on stock exchanges – they are not the same thing. Diesel fuel prices, which are particularly important in our economy, have not changed significantly in the last three months, as oil refiners have to bear a large part of the cost increase.
• House maintenance costs, which mainly include electricity, heat and gas, continue to reflect the overall decline in commodity prices.
• Very important – gas prices will fluctuate near their lowest level since the summer of 2021. European natural gas prices are below EUR 30 per MWh, which is much lower than the level in which prices for a large number of users. Therefore, the correction of heat consumption prices will continue in the next heating season, but the indirect effect in the prices of other goods and services will be seen in an even longer period.
• The weather and the increase in renewable energy capacity continue to reduce electricity prices – thus directly affecting consumer costs and an indirect effect – through costs to businesses.
• Wheat prices have risen by a tenth since the beginning of March, but it can be said that the general trend since the fall of 2022 is still down. The prices of wheat and other grains have a particularly strong effect on food prices in stores – they affect not only the prices of grain products, but also the prices of various livestock products. Since the beginning of last year, there has been no such change in the markets of the two most important dairy products traded internationally – powder and butter – which could have a significant impact take on the prices of dairy products in stores. Stability is therefore expected in this area.

As for events that are not directly linked to commodity prices, stable commodity prices will continue to decline gradually. Historically their prices have been stable, or relatively decreasing, determined by technological developments. During the pandemic, they increased significantly due to production and transportation capacity limitations. Now they are returning to the long-term movement. On the other hand, the prices of most services will continue to grow very quickly, this is confirmed by the salary increase in Latvia.

The increase in prices will not be a big problem for the Latvian economy this year or next year. Annual inflation may be slightly positive or negative in certain months. The nearest future in Latvia can be described as a time of price stability – the price level will not be stable, but its changes will not be a factor that will significantly affect well-being.

There is no doubt that the prices of individual goods and services will change significantly, in all directions. For example, in March, heat prices fell by 18.5%, and health care became more expensive by 6.5%. The general rule – costs are determined by constant or decreasing import prices. On the other hand, everything related to the consumption of time of Latvian residents will become more expensive, because the salary level is growing rapidly.