The drop in producer prices confirms the forecasts of deflation and increased role of exports
Producer prices are dropping at an ever faster rate, with the annual decrease in November reaching 9.0% and the monthly decrease 1.7%. The impact of this reduction on the Latvian economy should be assessed in three aspects.
First, the prices of production sold in Latvia have dropped at a faster rate than those of exports (-10.7% and -6.3%, respectively). That is a reflection of a greater drop in demand in the domestic rather than foreign market and can stimulate some producers to reorient themselves to exporting, which would promote the growth of the proportion of exports in the structure of Latvian GDP.
Second, the reduction in prices of products sold in Latvia is a confirmation that the drop in consumer prices will continue. The producer prices for these kinds of products are considered an indicator that outpaces consumer prices. For instance, during the previous period of rapid economic growth their annual increase reached its maximum in October 2007, seven months before inflation. As the economic recession started, the annual drop in producer prices of the products sold in Latvia began as early as May 2009, five months before an annual deflation of consumer prices was first observed.
Third, as the foreign demand resumes, the annual drop in producer prices of exported products keeps decreasing.