There IS Inflation in Latvia
According to the Central Statistical Bureau data, the consumer price level in July was slightly lower than in June (by 0.3%) and only 0.1% higher than in July 2015. To a great degree, the low inflation is still a reflection of supply side factors; the slackening in the rate of Latvian economic growth is also creating a dampening pressure on prices and inflation can be expected to remain low in the coming months as well.
In July, the 12-month inflation rose above zero and, as was expected, it was mostly on account on supply side factors. As of July, the base rate of the VAT tax has been applied to home management services and therefore the prices of these services rose. In July, the excise on tobacco products was also raised. Tobacco products are goods whose excise also depends on their value, furthermore, their consumer prices are not regulated and form in the market, therefore, the rise in excise may not be fully reflected in the final consumption price as far as the profit margin allows. In contrast to what was expected, the prices of tobacco products did not rise month-on-month, but the impact of excise on the price could appear with a slight lag.
The increase in the 12-month inflation in July was partially formed by the so-called base effect instead of new factors coming into play this year; i.e. the impact of some factors last year expressed itself with a different intensity. For instance, as a result of the energy price trend, the price of heating energy continued to drop in July 2015, whereas in July of this year, it slightly rose as a result of a different trend in world prices. Similarly, in July 2015, a slightly faster drop in the prices of some seasonally fluctuating prices of foodstuffs was observed, yet it was balanced by slightly more active sales of wearing apparel and footwear than last year.
The price of oil dropped yet again in the world market in July, which found its gradual reflection also in the price of fuel (the monthly average changes in prices were–1.1%). Last year, fuel prices in July dropped less, and thus this year's price dynamic in this consumption group brought down the overall inflation rate.
Even though a very strong correlation between the world agricultural and food price indices and Latvian retail food prices is often not observed, it is more common for some goods, for example, cereals or dairy. Because of the good harvest, a drop in prices was observed in the cereal group in the world market in July, and it was one of the greatest components bringing down the FAO agricultural and food price index after a rise of 5 months. A similar trend was observed in the consumer prices of cereal products, which reduced the 12-month inflation accordingly.
Inflation expectations did not change substantially in July, yet, despite the fact that the new housing bills with the new VAT rate were expected, the percentage of the residents who think that prices will grow at the rate seen so far and not faster, has grown slightly. It may have been affected by the gradual drop in fuel price, for fuel is a part of the so called frequent out of pocket purchases and the changes in its price have an impact on the mood of the consumers.
In the coming months, inflation, albeit in positive territory, could remain low: according to the GDP flash estimate, the growth rate of the Latvian economy continued to slow down in the second quarter. It means that the 12-month rise in wages, which slowed down in the first quarter, could remain lower than originally projected. The slowing in the wage growth rate could reduce the rise in consumption, thus not creating a pressure on the price level.