August inflation data do not indicate a substantial impact of Russian sanctions on food prices
In August 2014, inflation trends in Latvia were determined by several developments: seasonal factors whose impact was different from a year ago, the drop in oil prices and the strengthening of the U.S. dollar as well as the influence of Russian sanctions which was not, however, very pronounced. Any further trends in price development will be determined by the drop in world food prices resulting from the favourable weather conditions as well as the impact of geopolitical factors. Next year, the inflation indicator will also be influenced by the liberalization of the electrical power market postponed from this year.
Total annual inflation grew slightly in August (to 0.8%). Month-on-month, consumer prices fell by 0.6% under the impact of seasonal factors, oil prices and some sales events not related to seasonal factors (e.g., unprocessed food). The annual inflation meanwhile rose because of the so-called base effect: in August 2013, a more pronounced seasonal drop in prices was observed for vegetables and alcoholic beverages (beer) and also the new seasonal wearing apparel prices had not begun to dominate and the prices of several types of processed food products dropped.
In August, oil prices dropped in the global market, and that is reflected in the 2% drop in fuel prices. The strengthening of the US dollar meanwhile somewhat overshadows the effect of oil price reduction.
The seasonal factors were most pronounced in the prices of fresh vegetables as well as discount sales of footwear, whereas in the sales of wearing apparel the prices of the new season began to dominate, therefore the average price level grew in this group of goods. With the warm season ending, the prices of hotel services dropped. Yet, contrary to this explanation, the prices of catering and package holidays continued to grow (to an extent that is not characteristic of August).
Other types of events were related to the sales of food and non-food item sales in retail chains (e.g., so-called Mamutu dienas at Rimi supermarkets), yet they overlapped with the period where the focus was on the sales of foodstuffs unsold in Russia in the domestic market as well as the foodstuffs produced in other European Union (EU) countries possibly ending up in the Latvian market. In spite of all that, the drop in the prices of dairy products was minimal (0.4%) and the prices of cheese and meat products rose.
The rise in tradable non-food item prices is very low and it is largely explained by the proportion of imports in these groups of goods (wearing apparel, footwear, household appliances etc.), thus, with low inflation persisting in the countries from which the goods are imported (the main trading partners are the EU countries), inflation does not rise in Latvia.
Inflation expectations are diminishing. In the second half of July and the beginning of August, the trade relationship between Russia and the EU countries deteriorated, with wide repercussions in the foodstuffs market and the related discussions on the drop of foodstuffs prices could largely explain the drop in inflation expectations in August.
The drop in global foodstuffs prices caused by the favourable weather, as well as the impact of geopolitical factors are likely to bring down average inflation in 2014 and 2015. The 2015 inflation is expected to be higher overall than in 2014. Albeit economic growth is slowing somewhat this year, it is positive and growth in EU countries is improving slowly, which could slightly accelerate the rate at which prices are rising. Yet a significant role in the inflation of 2015 will be played by the contribution of energy prices, as the electrical power market is liberalized.