Annual inflation dynamic in May affected by short-lived factors
The annual inflation level in May dropped slightly (to 0.6%), yet it rather reflects the impact of short-lived and not fundamental factors. A slight drop in the annual inflation was caused by a drop in food prices, whereas core inflation remained at its April level.
The supply side impact of external factors rather worked to bring the price level down, for oil prices remained stable, whereas world food prices dropped. That was determined by an improvement in the predictions regarding the grain (particularly maize) harvest as well as the normalization of the situation in the world dairy market, which experienced a rapid rise in prices because of insufficient supply in 2013. The prices of vegetable oils also dropped in the world market in May.
Meanwhile some domestic supply factors had an upward impact on inflation, e.g., in Daugavpils the tariffs of water and sewage services were raised. In the coming months, the new tariffs of regulated prices will have opposite effects on inflation: a rise in water and sewage services by about 25% is expected in Riga and a substantial drop in intermediate operator payment tariffs is expected in the fixed and mobile communication networks as of 1 July.
In May, the prices of tourism related services increased (slightly more than seasonally last year in the corresponding period). The rise in tourism activity could become more pronounced in summer and that can be explained by Riga's status as a culture capital this year (and the related great number of events). A slight contribution to the rise in tourism in summer could also be related to the expected rise in the amount of investment necessary for obtaining temporary residence permits starting September, which might motivate some of those wanting to obtain such permits to come to Latvia earlier. The relevant decision was adopted at the beginning of May, but there was much speculation about it even earlier.
Of the demand side domestic factors, the rise in minimum wage and drop in labour taxes could have a gradual effect; in the first quarter, it resulted in a rise in salaries by 7.7% year-on-year. Yet the gradual character of the phenomenon as well as the interaction of several one-off factors are of essence here and for that reason, such a rise in remuneration does not have a rapid impact on consumption habits.
As the discussions on the power market abate and the first quarter data does not seem to indicate a drop in economic activity because of Ukraine, inflation expectations have also stabilized and did not change substantially in May.