Adjustment of consumer prices continues

Lower population incomes and business costs continued to result in dropping consumer prices in Latvia: 0.7% over a month and 1.2% over a year. At the same time, the drop in prices for food, heat, and many services have a positive effect on the population’s purchasing power.

A drop in prices over the previous month is still observed for the majority of goods and services. As a result of diminishing demand, both food and non-food item prices continued to fall. As the price of natural gas for the industrial clients continued to diminish, so did (by another 4.7%), the heating tariffs. The diminished demand and optimization of costs for businesses has likewise resulted in continued price reductions for a great part of services. A more rapid contraction of prices was prevented by the rising fuel prices, which resulted from rising global oil prices.

Compared to the previous year, more than 61% of commodities prices are lower than last year, thus supporting the population’s purchasing power under the conditions of contracting economy and incomes. The most substantial drop in prices has been observed for food items, particularly fruits and vegetables, as well as milk products and household related services. Also natural gas and heating tariffs are significantly lower than a year ago. An even greater drop in prices has been prevented by supply factors: as state financing has shrunk, prices continue to rise for administrated services (particularly health related ones), and the global oil prices have encouraged rises in fuel prices.

We predict the average annual inflation for 2009 at  3.6%. It is expected that next year the price dynamics will continue to be determined by a low level of demand and a moderate rise in prices for energy resources, and our prediction is that the deflation in 2010 will average 3.8%.

The prognosis related risks are balanced: the downward risks are primarily related to the decreasing incomes and the relatively high level of unemployment, which will continue to have a negative effect on domestic consumption. A lesser pressure to lower prices could however be caused by a growing shadow economy, as a result of which the actual reduction in population incomes must be estimated as lower than the data suggest; and resumed economic activity in the rest of the world could determine a higher growth in the prices for world energy resources and food. A return to a low level inflation is expected at the end of 2011.