Energy prices reduce deflation, prices of services continue on a downward trend

In April, the level of consumer prices increased for a second consecutive month and was 0.9% higher than in March. With the exception of energy resources and a seasonal price rise, the overall price level has not changed compared with the previous month. The persistently dropping incomes and the weak domestic demand acted to promote price decreases for almost all services: their price level dropped by 0.4%. Under the influence of the weak demand, a large percentage of food prices also continued to drop.

The bulk of the price increases observed over the month was the result of rising energy prices: as the trade price of natural gas started to go up, the prices for heat have grown substantially. The prices of seasonal vegetables continued to rise, having grown 75% since the end of last year, which could be explained by the cold winter and the related costs. The new season’s clothing continued to arrive in shops, which resulted in an apparent rise in clothing prices.

Compared to last year, the price level was lower for 72.1% of the total basket of commodities. Demonstrating a particularly significant reaction to the weak demand, the prices of various unregulated services have dropped. Even though the prices for heat grew in April, they were still 14.9% lower than a year ago. The prices of all food items, except vegetables, are likewise lower than a year ago.

It is expected that in the near future the dynamics of consumer prices will be determined by the upward pressure resulting from the rise in energy prices and the downward pressure of the weak demand. Although the rise in energy resources is already impeding the drop in the prices of various goods and services, we predict that, with a low domestic demand and dropping incomes persisting, we are likely to observe falling prices of a majority of goods and particularly services. As mentioned previously, Latvia will return to moderate inflation in the second half of 2011.