The annual inflation drops in October

Inflation data for October 2014 indicate that the so-called Russian embargo effect, albeit not considered substantial, possibly continues to retain a slight influence on food prices. The global foodstuff price drop has abated, however.

The average rise in consumer prices, as the prices of oil dropped more rapidly than the value of the dollar rose, was impeded by the prices of fuel but maintained by the prices of seasonal items, some services, as well as the appreciation of thermal energy under the impact of the prices of natural gas. The average monthly consumer price level did not change, but it increased last October and that is why the annual inflation dropped to 0.7%.

The inflation data of 2014 indicate that the so-called Russian embargo effect, albeit in August and September it was not important for the total inflation, may have retained its impact on the level of food prices.   In some groups of foodstuffs, in which the prices went quite a bit down in September (e.g., milk products), the drop continued but was much less. The trend in global food prices also does not indicate that in the near future the food price level in Latvia could drop substantially because of import prices. For instance, the Food and Agriculture Organization's (FAO) evaluation of the cereals' stock to use ratio (even though it's the highest in the recent years) has slightly dropped since September.

The seasonal effect in wearing apparel prices was maintained in October, with the prices rising, but, after the unexpectedly rapid rise in September, footwear prices dropped by 4.3% in October just as unexpectedly. Usually October sees a seasonal rise in these industrial goods, which was the case also in the years of the deepest crisis, but perhaps this year retailers had overdone it in September (i.e. overestimating the demand) when a greater than expected rise in footwear prices was registered.

The global oil prices in October continued to drop and the drop exceeded the rise in the value of the U.S. dollar, thus the monthly drop in fuel prices was the second largest this year, i.e. by 1.3%, becoming a substantial factor in bringing down the inflation level. A slight rise in thermal energy prices for the consumers who receive thermal energy in whose production natural gas has been used had a partially neutralizing effect on the overall reducing impact of total energy prices on inflation. The tariffs for November published by AS "Latvijas Gāze" indicate that thermal energy prices will remain at that level for said consumers also in November.

The prices of some services continued to rise slowly in October, e.g., a slight rise was observed for dry-cleaning, personal care and communication services. Yet, for instance, for catering services for which the September price rise was commented as being atypical or excessive for the season and economic conditions, prices no longer continued to grow. This example too indicates that the demand on the part of the service provider may have been evaluated as motivating price rises for a short period of time only.

Inflation expectations meanwhile (after diminishing in August and September) grew in October, which could mostly be related to the received price offers of power price offers. These were not unexpected, yet they influenced the impression about the total rise in prices over the next year.

The average inflation in 2014 will be among the lowest in the conditions of positive growth, yet there is a substantial contribution of global economic and geopolitical or external supply factors. The 2015 inflation is expected to be higher overall than in 2014 and the greatest role in bringing it up will be played by the contribution of energy prices as the power market is freed.