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 last year, which is a signal that the inflationary processes in Latvia have not ended.
The annual inflation rate in Latvia is currently one of the lowest in the European Union, but it is still basically explained by the drop in energy prices compared to the previous heating season. 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 rapid increase in the prices of natural resources seems unlikely, because, despite geopolitical risks, oil prices have fallen back to 80-85 dollars per barrel, and due to oil production restrictions, OPEC countries currently have atypically large spare production capacities, which limits the price growth potential in the near future.
Costs are decreasing, but prices are not
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 generally not become lower in Latvia. 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 lower energy prices have allowed other cost items to increase throughout the production, supply and trade chain. For example, wages continue to rise even though the economy has not grown in the last two years and inflation is generally easing.
Wages must rise, but this cannot happen at the expense of prices
At the moment, the biggest risk to inflation is still the rapid rise in wages both in Latvia, in the eurozone and elsewhere in the world. Although wage growth has slowed recently, it is still quite strong. Wages must rise, of course, but wage growth should come 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 my forecasts, inflation in Latvia will still be low in the next 2-3 months, and this is related 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.
