Drop in global demand drives down food prices
The annual inflation continued to drop in October reaching 4.4%. The monthly price rise in the amount of 0.2% was determined by seasonal factors, yet in October prices rose less than last year because of the gradually increasing downward pressure of global prices. The average annual inflation (used to determine how well the Maastricht criterion is met) was 4.1% in October.
The monthly inflation was determined primarily by the end of seasonal sales of footwear and wearing apparel as well as a rise in prices of vegetables. The drop in the prices of potatoes as well as some other food products was accounted for by the new harvests which are much better than a year ago. The global prices of oil in October were relatively stable, thus only a small (1.4%) rise in fuel prices has been observed. As the retail price of natural gas dropped, heating tariffs also went down slightly, by 1.3%.
A more rapid drop in food prices is coming into view in the world (see Fig. 1), evidenced by the latest data of the UN Food and Agriculture Organization. In October, the food price index dropped 4% month-on-month, reaching its eleven-month low; moreover, it has already dropped 9% since its peak at the beginning of the year. The drop in prices is determined by ever lesser prospects for the growth in global demand and by a good harvest for most products. Oil, milk product and grain prices have dropped most substantially – in October they were respectively 20.2%, 11.5% and 10.4% lower than in February of this year when the food price index reached its peak. The aforementioned drop in prices is expected to continue to find reflection in dropping food prices in Latvia as well. In view of the diminishing pressure of demand, the extent of this reflection will be primarily determined by domestic competition.
Figure 1. Global food prices, 2002-2004 =100
Source: UN Food and Agriculture Organization
The inflation level will drop rapidly next year and will be notably affected by the economic developments in Europe and elsewhere in the world. As worries regarding growth in Europe and elsewhere are continuing to grow, the pressure of demand on global price rises will be small. Yet a substantial drop that could cause a drop in retail prices in Latvia will be impeded by the still limited supply, especially as far as oil product supplies are concerned, which acts to redirect agricultural resources for bio fuel production.