The average inflation in 2009 at 3.5%: still not up to Maastricht

Despite dropping prices over the last months of the year, an average inflation of 3.5% was observed in Latvia (the latest prediction of the Bank of Latvia was 3.6%), for in the first three quarters of the year, the annual changes in consumer prices were still in the positive range. That means that inflation is still among the euro changeover criteria that Latvia is not meeting (another one is the budget deficit indicator, which, over the next couple of years will represent the main challenge).

In December consumer prices had dropped 0.5% over one month and 1.2% over the year. As over the couple of previous months, in December as well the December decrease in consumer prices in Latvia was continued to be determined by lower incomes of the population and lower business costs. At the same time, dropping prices for apparel and footwear, foodstuffs and many services, especially food services and the household related services had a positive effect on the population’s purchasing ability.

More than 65% of the basket of commodities prices were lower than at the end of 2008. Over the year, the most significant price decreases were observed for food products, particularly fruits and vegetables, as well as dairy products and household related services. Significantly lower than a year ago were the natural gas and heating energy tariffs. An even greater drop in prices was prevented by factors of offer: the reduction in state financing, especially in health services and education, and global oil prices.

Deflation observed at the end of last year, which is likely to continue over this year, forms the basis for restoring cost competitiveness and promotes an increase of export oriented economic activity. Over the next few months the drop in prices is expected to continue to be determined by the low demand, yet offer factors, e.g., raised prices on energy resources as well as various administrative decisions, e.g., the already implemented changes in public transportation tariffs in Riga as well as the expected revisions in the law on excise tax will slow down the rate of price decreases. It is expected that in 2010 the average deflation will reach 3.8% and will not persist. By the end of 2011 we are likely to return to a moderate consumer price inflation.