The economist of the Bank of Latvia, Ieva Opmane, points out that the rapid decrease in inflation in April has subsided.
In Latvia, in April, compared to the previous month, fuel prices increased slightly, while electricity and natural gas prices decreased slightly. Small fluctuations in energy prices here and there are common, and Opmane points out that we can look at it quite optimistically at the moment – it could have been worse.
The prices of global energy resources, following the events in the Middle East, have risen slightly, but they are not close to the peaks we experienced in 2022. Of course, in a tense geopolitical situation, this is an unstable balance that can quickly change and cause an increase in the prices of various global resources, as the rhymes are directly felt in our country, explains the economist of the Bank of Latvia.
Prices of services are still growing relatively fast domestically, especially those services that are labor intensive. Opmane points out that employees are a valuable and increasingly expensive resource, which is also reflected in the price dynamics of these services.
On the other hand, the increase in the prices of those services, where the contribution of other resources, including food and energy prices, to the final costs is significant, has subsided. The exception is transport-related services, which, taking into account the revision of public transport ticket prices, will see a considerable increase in April. Although the demand for certain services tends to be flexible, the overall still strong increase in service prices shows that this demand has not significantly decreased at present.
Opmane predicts that the average price level is expected to continue to rise slightly in the coming months, but the differences in the prices of different products are more pronounced. For some, including certain food products and services, they maintain a considerable increase, while for certain others, prices even decrease slightly.
“How much each of us will feel the increase in prices in the coming months will be influenced by what goods and services we mainly consume and how flexible we are able to replace them in case the prices of some products rise disproportionately, while others fall,” says Opmane.
“SEB banka” economist Dainis Gašpuitis admits that, despite some setbacks, the inflationary pressure in the Eurozone continues to decrease – this is indicated by company surveys and sentiment indicators. Producer price indices also point to lower prices of consumer goods.
The prices of raw materials have decreased significantly compared to the peak of 2022, although in some cases they are still significantly higher than before the pandemic, according to the economist. Energy prices, which raised inflation to the highest levels in the European Union (EU), have had a particularly large impact on consumer prices in Latvia. On the other hand, currently the normalization of energy prices has the opposite effect and has allowed inflation to decrease rapidly.
Housing fees are the only group where the price level has fallen, Gašpuitis points out. In the other groups, the price level has increased during the year. Latvia is no exception and similar to other countries, energy prices for consumers are still high from a historical point of view. Therefore, a slight further drop, for example in heat energy tariffs, is possible, but not more, according to Gašpuitis.
However, if energy prices fluctuate, inflation may quickly revive, the economist warns, noting that for now the outlook for those prices, at least in the short term, seems stable. The rate of inflation will increase towards the second half of the year also because the base effect of high energy prices will gradually disappear, explains Gašpuitis.
Food prices have stabilized and rapid changes are not expected, however, as consumption becomes more active, at much slower and different rates between groups, prices will continue to climb, the economist informs. Periodically, discounts and attractive offers may appear on consumer goods. This will be related to international competition, especially China’s desire to realize excess spare capacity to support its exports.
In services, the increase in prices will continue to be driven by the increase in wages, emphasizes Gašpuitis. Therefore, the rise in prices will be more pronounced in this segment, the only question is how fast it can continue without facing consumer resistance.
Bank “Citadele” economist Mārtiņš Āboliņš states that inflation in Latvia remains close to 1% for the sixth month in a row and is currently one of the lowest in the EU. According to the information published by the Central Statistical Office, in April consumer prices in Latvia were 1.1% higher than a year ago. In April, compared to March, consumer prices in Latvia increased by 0.5%, while since the beginning of the year, prices in Latvia have increased by 2.7%.
Although inflation in Latvia is currently low, due to seasonal factors, the prices of food and clothing increased in April, and the prices of services continue to increase. For example, service prices in Latvia increased by 0.6% in April and consumer prices in Latvia were 5.5% higher than in April of last year, which is a signal that inflationary processes in Latvia have not ended, Āboliņš points out.
The annual inflation rate in Latvia is currently one of the lowest in the EU, but it is still basically explained by the drop in energy prices compared to the previous heating season, explains Āboliņš. For example, heating energy prices in April were 17.7% lower than a year ago, and at current natural gas prices, they have the potential to decrease in the next heating season as well. However, the prices of natural resources in the world are no longer falling and in recent months they have started to rise again.
Also, sea freight costs remain elevated due to the geopolitical situation and attacks in the Red Sea. Similarly, since the end of winter, the prices of natural gas in Europe have also increased slightly, but still. In the coming months, however, a sharp increase in the prices of natural resources seems unlikely to Ābolin, because, despite geopolitical risks, oil prices have fallen again to 80-85 US dollars per barrel, and due to oil production restrictions, OPEC countries currently have atypically large free production capacities, which limits the potential for price growth in the near term.
Although in the last two years there has been a drop in the prices of natural resources in the world, consumer prices, not counting the prices of heating energy and electricity, have not become lower in Latvia as a whole, admits Āboliņš. For example, food prices in the world have decreased by approximately 25% since the middle of 2022, natural gas prices in Europe – by almost 90%, but food prices in Latvia reached a historically high level in April and were 0.3% higher than a year ago.
“The main reason seems to be that the reduction in energy prices has made it possible to increase other cost items throughout the production, supply and trade chain. For example, wages continue to grow, even though the economy has not grown in the last two years and inflation is generally decreasing,” says Āboliņš.
The economist points out that currently the biggest risk to inflation is still the rapid rise in wages both in Latvia, the eurozone and elsewhere in the world. Although wage growth has slowed recently, it is still quite strong. Of course, Āboliņš believes that wages must rise, but he points out that wage growth should be at the expense of improving economic efficiency, not at the expense of price increases.
The drop in resource prices in the world has contributed to the overall drop in inflation, but the inflationary pressure in the economy is still quite high, as evidenced by relatively high inflation expectations in businessmen’s surveys in both industry and service sectors. According to Āboliņš’s forecasts, inflation in Latvia will still be low in the next two or three months, and this is due to the high prices of thermal energy, electricity and other energy resources last year. However, in the second half of this year, inflation in Latvia will most likely start to rise again and could reach 3% by the end of the year, Āboliņš believes.
“Luminor Bank” economist Pēteris Strautiņš explains that global inflation this year has turned out to be a tougher problem than the financial markets expected, so interest rates are also decreasing more slowly than expected. However, things are generally moving in the right direction, also in Latvia. With a very high probability, it can be said that inflation in Latvia will not be a significant problem either this year or next, Strautiņš believes, however, he points out that it is not the case everywhere – the risks in the US are greater.
Currently, no product group has a decisive influence on changes in the overall price level, explains Strautiņš. Mostly, short-term factors are behind the most important price rises and falls. The biggest impact in April was on transport (0.43 percentage points) – at some point fuel became more expensive in the world, now it is becoming cheaper again. Alcohol and tobacco had an unusually large impact (0.42 percentage points) – the excise duty was recently increased.
Strautiņš predicts that the increase in health care costs will be persistent, but its impact will most likely decrease (currently 0.4 percentage points). The upside for other categories is currently much smaller. The biggest opposite effect is on housing costs – minus 1.13 percentage points – here we can see the drop in wholesale energy prices and their gradual transfer to consumers.
The big rise and fall of inflation in the last three years was determined by macro-economic events, global supply chains, and raw material markets, Strautiņš explains. These factors still matter and always will. However, at present, increased attention should also be paid to the events in the industries, their internal development logic, and the competitive situation.
The economist draws attention to the fact that in many product groups the fall in consumer prices has been very small compared to the fall in costs, or even none at all. But high profit margins always attract competition. If the technology is simple enough, if competing products can be imported from other countries, then prices will decrease accordingly. The fact that there is a rapid increase in wages in Latvia is a contributing factor to the increase in inflation, so the prices of most services will increase significantly. However, at the same time, the prices of many goods will still fall, predicts Strautiņš.
According to him, price “collapses” may occur in certain product groups. Their causes can be various. For example, for some crop products, to which higher prices consumers seem to have become accustomed and sellers try to maintain, the new equilibrium can be upset by an abnormally large harvest, after which prices go back on a downward trajectory. There are goods whose high price level is kept on the market by individual manufacturers or suppliers who have a large market power.
However, this may also turn out to be an unsustainable situation, says Strautiņš. Other suppliers, albeit with difficulty, are increasing their market share and at some point the loss of market share of expensive suppliers will become critical, they will be forced to change their strategy.
“The current price level after the rapid decrease in electricity, gas, electronic components and other cost items can be compared to ice or sulfur. You can walk on it for a while, but surprises can also happen,” says Strautiņš.
The economist believes that the average price level will be like a blanket, which in the near future will be pulled in opposite directions by various forces. The “dry residue” of this struggle will be price stability – changes in the overall price level that are not easily discernible in the tangle of curves of various categories that do not significantly affect welfare.
In the near future, base effects, or monthly inflation a year ago, will play a big role, says Strautiņš. In May, due to this, annual inflation will decrease rapidly – last May, prices rose by 1.2% compared to April, much more than usual. According to Strautiņš’s forecasts, monthly inflation will be very moderate in May this year, price stability will be facilitated by the entry into force of reduced heat tariffs.
The Public Services Regulatory Commission informs that 18 heat producers have already reduced or will reduce tariffs in May. Compared to a year ago, this year in May heat prices in Latvia will be 22% lower. Fuel prices in world markets are also currently rather downward. Diesel fuel prices on the stock exchanges are currently the lowest since mid-January.
Strautiņš predicts that annual inflation will rise again in June, but in the second half of the year it will generally be lower than it was in April. The economist believes that this year’s average inflation will be around 0.5%.
It has already been reported that consumer prices in Latvia increased by 0.5% in April this year compared to March, but during the year – in April this year compared to April 2023 – increased by 1.1%, while the annual inflation was 0.9% a month earlier.
At the same time, the 12-month average level of consumer prices, compared to the previous 12 months, increased by 3.4% in April.
