Energy prices continue to push up consumer price index

Even though the weak domestic demand, high unemployment and contracted loan portfolio still continue to limit inflation risks in the medium term, developments in the world energy resource markets and domestic decisions regarding taxes continue to push up prices in the short term. The consumer price level continued to rise in April, increasing 1.1% month-on-month. The appreciating of energy resources, with the price of electrical power accounting for 0.4 and fuel prices 0.1 percentage points of the monthly inflation,  has had the most significant effect on prices. Food prices have also continued to rise, pushing up the monthly inflation by 0.3 percentage points. The seasonal rise of footwear and clothing prices also continued in April (6.3% month-on-month). 

The consumer price level has thus risen 4.5% over a year. However, if food and energy resource effect is excluded, the prices of other goods and services were on average still slightly (by 0.1%) lower than a year ago. 

The drop in prices of oil and other goods at the end of last week indicates that the situation is unstable in the global commodity markets. Many of those who have invested in commodities are beginning to consider the risk margin of these investments too high and are beginning to dispose of the investments. The price rate of oil dropped about 10% within a couple of days in the end of the last week. Yet it has caused no panic and at the beginning of this week the prices have not continued to drop; they have even increased again slightly. Uncertainty regarding the price dynamic of oil and other goods thus continues in the world. Pressure on oil prices is maintained also by the tensions in Libya and other oil producing countries as well as Japan's need to replace the energy not produced by the failed nuclear reactors with other energy sources. 

The high global prices of energy resources will continue to have a substantial effect on consumer price dynamics in Latvia. The slowing down or even reversal of oil price rises could shortly find a reflection in the prices of fuel (this effect, however, would be counteracted to some extent by the raising of excise tax rates scheduled for the middle of the year), but rises are yet to come regarding the tariffs of other energy resources, i.e. natural gas and thermal energy produced from it, which are affected by the 9-month averaged global oil prices. "Latvijas Gāze" has predicted that in the next few months the sale prices of natural gas are going to rise thereby pushing up the heating tariffs as well. The population will feel this only with the start of the heating season, yet the raised tariffs will appear in the consumer price index at the moment of their adoption. Moreover, making the purchases of natural gas for the Inčukalns storage facility at a time when the prices of gas are on the rise could delay the abating of energy resource price rises (or their reversal) in Latvia at the end of the year as well. Inflation will thus continue to remain rather high this year and, on the condition that global food and energy prices stabilize and taxes are not raised in Latvia, a measurable drop in inflation can only be expected next year.