Average annual inflation approaching Maastricht criterion

The annual inflation in July continued to drop in Latvia, reaching a mere 1.7%. Within a month, consumer prices dropped 0.5%, and the 12-month average inflation (according to national data at 3.4%) approached the Maastricht criterion.

The monthly inflation was primarily brought down by seasonal sales of wearing apparel and footware as well as the reduction of the VAT rate by 1 percentage point, whereas it was impacted in the opposite direction by the prices of energy resources: the 9-month rise in mazout prices observed in the first nine months transferred to the tariffs of natural gas and thermal energy. The rise in oil prices in the global market resumed in July and the exchange rate of the US dollar rose, but the price rises on fuel was gradual and the monthly average remained lower than the average fuel price in June.

The prices of unprocessed foods dropped slightly more than expected and food prices went down overall. The drop in milk and it products prices was influenced both by a drop in purchasing prices and a reduction in the VAT rate; the prices of meat and its products also dopped. The drop (by 16.9%) in vegetable prices was substantial as the supply of seasonal vegetables grew.

As the prices of food and energy resources contribute a great proportion of the Latvian consumption basket, the supply-side factors will continue to have a substantial impact on inflation. The annual inflation will remain low, but a rapid downward trend will no longer be observed. At the moment, political unrest is continuing within the borders of several Middle Eastern countries and international pressure on the countries in this region, particularly Iran, is growing, e.g., from the US. The news on the prices of agricultural products continue to be dual in nature: grain harvests are good overall albeit suffering from draught in some places. Some difficulties in harvesting may also be caused by the rain, including in Latvia. Therefore uncertainty regarding the development of global energy resources and food prices remains rather high.

Consumer confidence indicators do not suggest a possible renewal of supply-side pressure on the consumer price level. The economic growth of Latvia's main trading partners, including the euro zone, is slowing and the 12-month average inflation is dropping gradually. Latvia's inflation indicators, however, are dropping at a faster level, approaching the level required when evaluating the Maastricht criterion, and this is determined both by base factors that had a beneficial impact on the dropping annual inflation shis year and by the more balanced economic growth compared to the pre-crisis period.