The annual inflation in November will be circumscribed by the impact of oil prices

The consumer price level of November 2014 was substantially impacted by the drop in world oil prices, which caused a reduction in fuel prices. Yet the annual inflation did not drop (it reached 0.9%), for the prices of other consumer goods and services remained relatively stable on average, and a greater monthly drop in the consumer price level was observed in November of last year.

World oil prices continued to drop also in November and that is promoted by the announcement by OPEC countries that production will not be reduced. In November, too, the Brent oil price reduction (by 8.6%) exceeded the rise in the value of US dollar (by 1.6%), thus the month-on-month drop in fuel prices in Latvia was the greatest since the beginning of 2009, i.e. 3.8%. According to the tariff projections for December and January published by AS "Latvijas Gāze", the natural gas tariffs for the industrial consumers (incl. many producers of thermal energy) could return to the September level (i.e. contract by 1 degree), but the actual dynamic of world oil prices indicates that in the coming months a more significant drop in natural gas prices is possible, including also for households and not only industrial consumers. The uncertainty that reigns in the oil market, however, does not allow speculations as to the stability of such prices.

The world food price level in November 2014 remained unchanged.  Mostly the prices of dairy products went down (as a result of sufficient supply and reduced demand from China and Russia) and the prices of grain products resumed rising. That, in turn, resulted from an assessment of the weather in the northern hemisphere on the new sowings.  Meanwhile in Latvia the drop in retail food prices has also stopped: even though the Russian food embargo is still in place, the prices of, e.g., dairy products began climbing somewhat in Latvian shops. Usually in November it would be explained by the characteristic rise in the prices of milk purchases, but this year it could be attributed to other factors. The impact of food prices on the total annual inflation was not significant.

No significant changes in administered prices were observed in November, but in January 2015, services relating to dwelling could appreciate in Riga and Jelgava.  Higher tariffs for waste disposal have been approved for the largest waste management businesses in these cities.  Meanwhile, the average price annual rise in core inflation components does not exceed the level observed this year so far and does not indicate a greater impact from demand.  

Inflation expectations that grew in October along with the distributed electricity price offers continued to grow in November. Such an assessment could be slightly affected by thermal energy bills, which reflected the short-lived price rise, but the increasingly frequent comments and advertisements by businesses on the liberalization of the electricity market could exert a psychological pressure on the price level evaluation.

The economic weakness and low inflation in many of Latvia’s important trading partners as well as the oil price level do not create an external pressure on the consumer price level in Latvia. The strengthening of the US dollar is working slightly in the direction of increase but in the coming months, it could primarily be domestic factors: the liberalization of the power market and, relatively slightly, income, since the rise in the real net salary could slow down next year.