Inflation slowly loses steam
Although inflation has receded in March compared to the record highs witnessed in the previous months, it is still elevated, and both headline inflation and price hikes in Latvia, excluding the variable energy and food prices, are among the highest in the euro area. In March 2023, the year-on-year price rise in Latvia was 17.3%, while the month-on-month price rise was 0.7%.
Various state support programmes to mitigate the increase in energy prices are still running. However, energy prices have also stabilised at lower levels than those seen during autumn and winter months. In several municipalities, district heating tariffs were cut in March, while in others such decrease is expected over the coming months. Amid active competition between natural gas suppliers, consumers are also expected to feel its impact soon when receiving lower bills. Nevertheless, some global events point to other possible opposite developments in energy prices, for instance, global oil prices have slightly increased due to an agreement on reducing oil extraction levels reached by OPEC+ countries.
The period of elevated inflation has affected the structure of price hikes. As in other euro area countries, Latvia also experiences a relatively high core inflation. It has picked up owing to the indirect effects of the rise in energy costs. The impact of wage increase on core inflation has so far been assessed as minor; yet the dynamics of wages over this year amid other business costs decreasing is a relevant issue. Although a steeper wage growth can help maintain consumer purchasing power, it also serves as an upward pressure on price hikes both from the demand and supply side.
According to the economic development forecasts announced by Latvijas Banka in March, inflation in Latvia is projected to reach 10.0% this year. This "ten" is not far away anymore. Taking account of the trends in global input price developments and the assessment of their impact on inflation in Latvia, it is expected that, with the current development scenario remaining valid, inflation in Latvia will drop to a single-digit figure already in the second half of the year, hovering around 3% at the end of the year.