On Inflation in February 2009
In February, annual inflation continued on a downward trend, declining to 9.6%. The month-on-month rise in general consumer prices was 1.1%, primarily due to changes in the excise tax rate.
In February, notable price rises were recorded for fuel (12.4%); nevertheless, against February of the previous year fuel prices dropped 12.2%. Due to excise tax changes, alcohol prices picked up 8.4% in February; in a similar way, the prices of non-alcoholic beverages and coffee went up. Tobacco prices recorded an upswing of 13.2%, with the January effects of higher excise tax spilling over in February. Given the sharply weakening demand, a general decrease in food prices of 0.7% was recorded in February, while the prices of dairy products, cheese and vegetables dropped 4.5%. 3.6% and 4.2% respectively.
The consumer price falls are likely to be steeper than previously expected due to the ongoing downturn of the economic activity and continuously weakening demand. Consequently, already in the second half of the current year, a general consumer price decline, i.e. deflation, may be expected, with average inflation for 2009 standing at 3.1%.
From the point of view of renewing competitiveness of Latvian businesses that have been adversely affected by high inflation rates of the previous years, lower general consumer price levels are a positive and welcome phenomenon. However, falling into a deflationary trap may also undermine the economic recovery, as in the situation of subdued demand the prices tend to drop and cause market participants to expect further price falls, thus, in turn, resulting in postponed consumption and investment decisions. Hence at the current junction it is vital to implement, without delay, the economic recovery programme that would be a step toward the revival of economic activity and deflationary spiral risk aversion.