We are catching Lithuania and Estonia. On consumer prices in October 2021

Catching Lithuania and Estonia is usually talked about in the context of repeating their recent success in attracting investment and increasing exports. Fortunately, Latvia has also lagged behind in another area – the rise in consumer prices. Inflation reached 7.0% in Estonia in October, and even 8.2% in Lithuania (preliminary data). Consumer price in Latvia annual inflation was 6.0% in October, according to Eurostat’s already known estimates. Compared to September, the cost of living increased by 1.1%.

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Another good news is that Latvia’s “hopes” to catch the inflation rates of neighboring countries are not convincing. They are in different phases of the economic cycle, they have a much more dynamic housing and credit market, and consumption in Lithuania is also growing much faster. Everywhere in the Baltics and Europe, inflation is fueled by rising import costs, but the steepness of the wage and price spiral is different.

The main drivers of inflation remain transport and housing costs, which together account for almost 2/3 of annual inflation, each accounting for 1.9 percentage points. The “contribution” of food was also significant (1.1%), so that the rise in prices of all other goods and services accounted for only a sixth. On an annual basis, transport and housing costs grew by 15.6% and 11.8%, respectively, and food – by 4.5%.

The prices of certain food products are growing much faster, in October, so to speak, with the naked eye it was seen that milk and its products are becoming more expensive. Today, this feeling was confirmed by statisticians – this product category in October was 10.1% more expensive than a year ago. Fortunately, the situation was partly saved by the slowdown in pork (-5.4%), which was also noticeable.

Unfortunately, inflation will continue to rise, as evidenced by developments in stock exchanges, the “achievements” of neighboring countries and rising producer prices, which outpace consumer price inflation. Already in September, there was a very sharp jump of producers in the domestic market to 20.4%, compared to 15.9% in August. The worst news is that electricity, gas and heat producer prices in September were 31.0% higher than a year ago.

Fortunately, in a number of other areas that are important to consumers and socially sensitive, producer price inflation is much lower. Food producer prices in September were 4% higher than a year ago. Stock prices for food raw materials have risen, but the industry suffers less from global component supply problems, much of which is local. Also, demand for food cannot fluctuate so sharply, it is precisely fluctuations in demand that are the main factor in the convulsions of global prices and supplies.

Clothes manufactured in Latvia were 4.8% cheaper. Annual drug price inflation was 3.9%, but construction materials were 4.1% more expensive than in September last year. The fact that timber prices have increased by 51.2% has a greater impact on investment costs, as does the increase in equipment and machinery costs by 70.7%.

As for the “deep” reasons for the ongoing rise in prices, they can be thoughtfully described as a stray economy between the past and the future. There is a grand synchronization problem in the global economy. Demand for goods is very strong, it is “heated” by both economic stimulus measures and limited opportunities to buy services, so people buy more goods.

As manufacturers have planned capacity under “normal” conditions, it is not possible to increase production so rapidly. This could be done in the longer term, but manufacturers do not know how long it will last. Therefore, they are cautious about investing in increasing production capacity. In addition, investment costs have risen sharply. Therefore, producers alone have to enjoy the period of high prices and postpone making strategic decisions. This is not difficult, as the average profits of listed companies are now far higher than expected.

The situation is further complicated by the problem of synchronization in the transition to new energy sources. The basis for the rise in oil prices was laid when the sharp fall in prices took place in 2014, we have not yet returned to the current levels, although prices have risen in the recent past. When oil prices exceeded $ 100 a barrel, the industry invested about $ 1,000 billion a year in extraction, after which investment more than halved and has not recovered. In addition, the current price increase does not dampen the caution of oil producers.

It takes decades to pay for itself in oil and other raw materials. However, the prospects for oil demand in the future are very uncertain, as carmakers plan to switch to electric propulsion technologies, as required by governments and consumers. The so-called “sunset industries” tend to be very profitable for companies that know how to use this time, but it may not be a good time for consumers.

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