Annual inflation rose in May, indicating sustained demand

In May 2015, the annual inflation rose, reaching 1.2%. The rise was mostly due to price rises in some core inflation goods and services groups and a greater than usual for the seasonal average price rises in some groups of goods for which a seasonal fluctuation in prices is characteristic. Thus data suggest a sustained demand.

The rise in oil prices in May compared to the April average was a little faster than in  April, therefore fuel merchants continued to gradually raise the retail prices of fuel (they rose on average by 1.9%). Yet overall, the average price level of oil is rising relatively gradually and therefore the AS "Latvijas Gāze" has not changed its outlook of further reduction in natural gas tariffs for industrial consumers that could have an impact on inflation in June and July.

FAO (Food and Agriculture Organization of the United Nations) agricultural and food price index dropped also in May, primarily in dairy and cereal goods groups in which stocks were formed. The Latvian purchase price of milk continued to rise until April, but in the summer season a rise would not be characteristic. In food retail, the month of May was characterized by a faster than seasonally traditional rise in the prices of fruit and, slightly, in vegetable and potato prices, whereas the prices of dairy products, for example, dropped according to the world price trends.

FAO published assessment of the ratio between the world cereal stocks and their use for the next season, albeit lower than the very high assessment for this season, was slightly improved compared to May.  Thus the pressure on prices in the new harvest season could resume at a slower rate.

In May, core inflation grew slightly more than expected, which is only partially explained by the many events related to the presidency of the European Union (EU) Council because of which the prices of accommodation services might have risen more than is usual for the May average. Yet faster than in May on average, the prices for wearing apparel, transport vehicles and in almost all the groups of goods and services related to leisure and culture grew.  Prices grew for technological goods (both those related to home improvement and those related to leisure and culture) as well as for communication services. In these cases, the effect of the small-scale market could be exhausted (competing for a market share by way of price), and a gradual rise in income may be motivating merchants and service providers to raise the price level, and that demonstrates the effect of sustained demand.

Along with the launch of the Asset Purchase Programme (APP), the euro area inflation could increase and, by way of activated demand, not only increase Latvian export but also stimulate a renewed rise in prices. This year's inflation, under the impact of world energy and food prices, might not yet exceed the level of 2014, but in 2016, as the external demand activates and the income level rises slightly faster, the domestic price level could  also rise faster, approaching 2%.