External factors and changes in taxation to influence price dynamics
Consumer prices continued to grow in November. As global prices continued to drive up food and fuel prices, the general consumer price level has risen by 0.2% and is 1.9% higher than a year ago. The pressure of the low domestic demand has continued to drive down the prices of services, which were 0.2% lower month-on-month and 2.6% lower year-on-year.
The 12-month average inflation, one of the indicators included in the Maastricht criteria, was negative year-on-year, posting deflation of 1.4%. Core inflation, which does not include such variables as the prices of energy resources and unprocessed food, remained negative in November at -0.6%.
At the moment, the influence of global food prices is beginning to diminish as the world's food prices seem to stabilize. The rising global oil prices, however, continue to contribute to an upward pressure on domestic energy prices, starting with the expected rise in electrical power tariffs next April. The recent appreciation of the US dollar has acted to augment this pressure on prices in Latvia.
In the next few months the price rises are expected to continue but in mid-year inflation is likely to abate. Domestic demand continues to register a very uneven recovery and the unemployment rate continues to be significant, therefore the rise in inflation determined by external factors will be short-lived and inflation will go down as soon as the external pressure on costs diminishes. The significant amount of uncertainty regarding development in the US and the euro zone will effectively limit global price rises. Yet an additional price hike would result from the expected rise in VAT, which will drive up consumer price inflation. Its overall influence may reach one percentage point, with the expected VAT on electrical energy accounting for one third of it.