Annual inflation continued to fall in July; a more notable dip expected next year

Annual inflation continued to drop for a second consecutive month, reaching 4.3% in July. Albeit changes in the rates of both excise and value added taxes came into effect in July, which raised the prices of natural gas (+16.9%) and tobacco products (+1.0%), the overall  consumer price level dropped 0.3% over a month. The drop in the overall price level was promoted both by the stabilization of world prices and seasonal factors.

Oil prices on the world's stock exchanges were rather stable last month, nor did fuel prices change in Latvia. A drop, however, was observed in food prices. That was primarily determined by a substantial drop in vegetable prices over a month – by 14.2%; the vegetable prices were thus 12.6% below the previous year's level. Vegetable prices are still being brought down both by the drop in the prices of imported vegetables and Russia's ban on vegetable imports from Latvia and the other two Baltic countries, which acts to increase the local supply. Price rises have been hampered also by seasonal factors under whose influence the prices of clothing and particularly footwear have dropped substantially, by 6.3%.

The price level is expected to be rather stable in the coming months, but a substantial dip in the annual inflation is expected next year. In the second half of this year consumer prices will be affected by a rise in the excise tax on natural gas, which may be an additional upward pressure on the production of other industries, e.g., heat, of which the population will be particularly keenly aware as the heating season starts. Uncertainty reigns in the world's commodity markets. The prices of goods are fluctuating noticeably under the influence of the problems in the euro area and the United States. The development of food prices will be determined by the amount of the new harvest, yet the influence of possible price drops will likely reach retail after a delay of several months. Last week, the oil prices on the global exchanges again dropped 10%, almost reaching the level in May. Yet there are many uncertainties related to their further development as well, tied, for instance to political instability in some oil-producing countries. In terms of changes in global prices, we must understand that Latvia has no influence on them, yet we can reduce sharp retail price fluctuations in the longer term by stimulating competition in the domestic market, which would motivate also the development of more effective production.