Cheaper energy, more expensive food and clothing
Bank “Citadele” economist Mārtiņš Āboliņš noted that inflation in Latvia remains close to 1% for the sixth consecutive month and is currently one of the lowest in the European Union.
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.
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.
Employees are a valuable and increasingly expensive resource
Ieva Opmane, economist of the Bank of Latvia, explained: the prices of services are still growing relatively fast domestically, especially those services that are labor intensive.
“Employees are a valuable and increasingly expensive resource, which is also reflected in the dynamics of the prices of these services. On the other hand, the increase in the prices of services where the contribution of other resources, including food and energy prices, to the final costs is significant,” assessed the economist.
The exception is transport-related services, which, taking into account the review of public transport ticket prices, will see a considerable increase in April.
Although the demand for certain services tends to be flexible, in general, the still strong increase in service prices shows that this demand has not decreased significantly at the moment, Opmane said.
Costs are decreasing, but prices are not
The economist of the “Citadele” bank noted that, although in the last two years there has been a drop in the prices of natural resources in the world, consumer prices, excluding the prices of heating energy and electricity, have not become lower in Latvia as a whole. 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 allowed other cost items to increase throughout the production, supply and trade chain.
For example, salaries continue to grow, even though the economy has not grown in the last two years and inflation is decreasing in general,” said Āboliņš.
According to the economist, 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.
“Salaries must grow, of course, but wage growth should come at the expense of improving economic efficiency, not at the expense of price increases,” explained the bank’s economist.
Inflation may reach 3% at the end of the year
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.
Āboliņš estimated that 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.
The economist of the Bank of Latvia estimated that the average price level is expected to continue to rise slightly in the coming months, however, the differences in the prices of various 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,” the economist said.
