Comment on inflation in August 2009

In August prices declined for the fifth consecutive month as compared with the previous period and the level of consumer prices recorded only a 1.8% year-on-year rise. Pressure on price decline continued to intensify, with household income decreasing. At the same time, decrease in costs and reduction in wages, bringing them more in line with the productivity, allowed for the reduction of previously high sales prices. However, in a situation when firms have to introduce structural changes (raise productivity, modify products and services and increase efficiency of deliveries), the decrease in prices is relatively slow as the changes that ensure manufacturing of products or provision of services with lower costs is a time-consuming process.

With personal income still on a downward trend, the prices fell year-on-year in many groups of consumer goods and services. Prices continued to decrease for both clothing and footwear, and household goods and services. A traditionally more pronounced decline (month-on-month) in vegetable and fruit prices was observed in August due to seasonal factors. However, as a result of falling demand and stabilisation of the global food prices, the food prices have currently dropped by -3.3% on average also as compared with the previous year.

Financial services fees continued to grow and, in addition, increase of fuel prices resumed an upward trend in August after a slight drop in July.

Weakening purchasing power of households and corporate restructuring in order to adapt to the decline in costs and demand will continue to contribute to the price drop in the nearest months, thus ensuring a return of the economy to a sustainable level of prices. Moreover, the decline in global food prices, in particular, those of dairy products and cereal products, will continue to affect the food prices in Latvia. Annual inflation rate is expected to become negative in October. Considering both the price increase recorded in the first half of the year and the price drop expected at the end of the year, the average annual inflation forecast of 3.0% - 3.5% remains unchanged.