He explained that the global economic recovery and growing demand, as well as the supply-side constraints associated with the pandemic, are reflected in a temporary rise in consumer price inflation, which has replaced a short period of deflation.
According to the Bank of Latvia’s forecasts, the peak of inflation will be reached around 2021/2022. the case where the annual increase in consumer prices could temporarily exceed 5%.
The rise in inflation is largely determined by the rise in energy prices on world stock exchanges and its direct impact on fuel, as well as heat, gas and electricity prices, the increase of which was announced in the second half of 2021 in the summer.
“Although commodity prices are rising sharply, consumer price inflation is rising much more slowly than commodity prices. Commodities are just one of the cost items of final products, and here the transmission to inflation is gradual – with a delay of several months – and not always full,” Rutkaste explained.
He added that the recovery of the labor market is rapid – unemployment is declining even after the end of government support for the idle, and wage growth remains stable. The dynamics of service prices are generally moderate, but further increases will be driven by both deferred demand and cost factors.
“The increase in industrial goods prices is influenced by the global container deficit and thus transportation prices. Inflation expectations have risen significantly since the beginning of the year. Producer and consumer inflation expectations, although lagging behind pre-global financial crisis, are higher in several years,”
Taking this into account, the inflation forecast has been increased to 2.8% for 2021 and 4% for 2022. Economic growth and sustained wage growth will lead to a gradual increase in core inflation over the forecast horizon, but as global commodity price pressures ease, the Bank of Latvia’s inflation estimate for 2023 will return below 3%.
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