Annual inflation is low, whereas core inflation reflects economic growth
In June, the year-on-year consumer price inflation remained stable (0.7%) and the rise in prices were primarily the result of domestic demand factors.
The total impact of external supply factors on the Latvian inflation in June was rather neutral because oil prices in the second half of June rose because of attacks on the largest Iraqi oil processing plant and global food prices fell for a third consecutive month. Along with improvement in the weather conditions in the largest grain exporters and the expectations for greater trade volumes, the assessment of global grain harvests improved substantially, with the ratio of seasonal stocks to sales increasing to 24.3%, which is the highest level in 12 years (FAO data). If these forecasts turn out to be accurate, it could be a lowering factor vis-à-vis this season's food prices.
The domestic supply factors in June had no fundamental impact on inflation, whereas the inflation in July will be affected by rising water and sewage services tariffs in Riga and a substantial drop in intermediary operator tariffs in the fixed and mobile communication networks as of 1 July as well as the drop in roaming tariffs. These might be partially "compensated" by the new higher Tele2 tariffs. The price of natural gas for households has remained unchanged in the second half of the year and will have no impact on inflation, but because of the assessment of future prices of oil products Latvijas Gāze forecasts a small rise in natural gas tariffs for industrial consumers in July, impacting the price of heating.
Core inflation exceeds overall inflation (i.e., the low total inflation level derives from supply factors). The impact of demand in the core inflation data is rather felt in prices of services. In June, just as in May, the prices of tourism-related services underwent a seasonal rise that was higher than a year ago, and this dynamic has probably resulted from a rise in tourism activity related to Riga's cultural capital status this year. Such activities, even if they have a short-lived impact on the price level do not constitute a tendency. Even though Riga can expect a large number of guests in July when the World's Choir Olympics will take place in Latvia, this event may have a short-term impact on service prices (and more likely SPCI, instead of PCI), similarly to what happened during the World Hockey Championship in 2006 when the difference between the yearly PCI and SPCI grew only during the month of the event.