The export branch sustains producer prices; competitiveness improves

In October, producer prices grew for the second month running (by 0.1%), as a result of rising producer prices of the export products.  The rise in export production, which has been sustained for the fourth consecutive month, was mostly fostered by a rise in the prices of the world’s natural resources as well as the renewed global demand. In keeping with the low domestic demand, the producer prices for goods sold in the domestic market, continued to drop.

Compared to the previous year, the low domestic demand as well as dropping costs determined producer prices that were lower, by a total of 8.8%, both for the goods sold on the domestic market and for exports.

Since the beginning of the year, the effective exchange rate of the lats, which is calculated taking into account producer prices in processing industries, had dropped by as much as 5% by September. The real effective exchange rate is one of the indicators of economic competitiveness and its drop signals an improvement in foreign competitiveness by and large determined by reduced production costs, especially those related to labour.

For a brief theoretical digression: the real effective lats exchange rate is based on the changes in the nominal exchange rate against the main trade partners as well as changes in inflation both in Latvia and the partner countries. It must be noted, however, that the real currency exchange rate is but one indicator of competitiveness: it is determined not only by prices but also by other factors, including quality, brand recognition etc. The real exchange rate trends become obvious over a longer period of time.

Finally, on the developments to be expected. As the domestic demand continues, the drop in producer prices for goods sold in the domestic market is likewise expected to continue in the near future. The dropping producer prices prompts expectations for the deflation, which has just started, to continue; yet sustained increased global price levels and a recovered global demand will act to decrease the deflation levels in Latvia.