Consumer price levels lower in October than last year

As predicted before, in October for the first time we observed a drop in consumer prices year-on-year. The weakening demand caused by the drop in population incomes, optimization in business expenditures, as well as the dropping prices in some of Latvia’s import partners, are behind the consumer price level that is 0.9% lower than one year ago.

A drop in prices has been observed in almost all price groups. Food prices, at 5.3% lower than a year ago, are particularly affected. The tariffs on gas and heat have been reduced as the sale prices of natural gas have decreased substantially. Price drops would be even steeper if they were not cushioned by the administered prices, e.g., on health and social services and education, which are still higher than last year. Given that state financing has been reduced for these branches of the economy, no substantial drop in prices is expected in the future as well. Price decreases are also hindered by the changes in indirect tax rates at the beginning of this year.

If the economic activity remains weak, next year will bring deflation. In the current situation, the drop in prices is a positive development because it counteracts the reduced consumption that has accompanied reduced incomes for the population. For businesses, the reduced demand and average salaries dictate the need and provide the opportunity to cut costs, which improves their competitiveness in foreign markets.

We expect the average annual inflation for 2009 to reach 3.6%, whereas in 2010 it should be at -3.8%. How low the prices will drop, however, will be determined by the chances for recovery both in Latvia an elsewhere. A return to a moderate inflation is expected as early as the end of 2011.