External factors continue to determine a rise in producer prices

While the weak domestic demand persisted, prices continued to grow elsewhere in the world and Latvian producer prices in April continued to rise (by 2.2%) for a fifth consecutive month. In the yearly perspective as well the price level was positive for the first time since last March having grown 0.5%.

The annual rise was accounted for by a fast rise in the prices of exported products, affected both by a recovery of foreign demand, the result of which was the opportunity for manufacturers to offer their products on the market for a higher price, and a rise in resource prices. The prices of exported products were 7.3% higher than a year ago. In view of the drop in costs of labour and the low demand in the domestic market, the producer prices of goods sold here were still below last year’s level. However, as the producer costs grew in April under the influence of rising prices of global energy resources and food, the drop in prices of domestic products has also slowed down radically. This drop was substantially abated by the natural gas tariffs, which have leapt up significantly. The production of energy resources became 7.1% more costly compared to the previous month and accounted for the bulk (1.5 percentage points) of the month’s price rise.

In view of the fact that the rise in prices of natural resources has resulted in a price rise everywhere in the world, the price rise in Latvia, influenced by the still dropping labour costs, was lower than in its trade partners and therefore the competitiveness of businesses in the foreign markets continued to improve. The drop in the real effective exchange rate, which is calculated on the basis of the producer price index, continued to grow and in February it was already -9.3% lower than a year ago. The improved competitiveness is also reflected in the continually growing export indicators.

The above factors are likely to have an effect on changes in producer prices in the future as well, but a steep rise in the domestic energy resource tariffs as was experienced in April is not expected in the near future. The most important risks in price development are related to the insecurity regarding the recovery of foreign demand, particularly in the euro zone.