Global prices stabilized yet in Latvia their effect still reflected in price rises

The annual inflation in May continued to rise reaching 5.0%, with the 12-month average inflation rising to 2.1%. The pace of monthly price rises compared to the beginning of year rate has dropped – the price level was 0.4% higher than in April. Even though the global food and energy prices have stabilized, in Latvia the effect of their former upward trend is still reflected in price rises. Particularly affected are energy prices which react to the global price dynamics with some delay. Thus in May the price rises were particularly affected by the rise in heating tariffs, but food prices have also continued to grow. The drop in global oil prices in May did find reflection in the fuel price dynamics: these prices dropped for the first time in eight months (by 0.7%).

The level of retail prices is expected to continue to grow, since the sales prices of natural gas are going to climb in turn impacting heating tariffs. The rises in natural gas prices are determined by the price dynamics of global energy prices of the last nine months. At the moment the impact of the rapid price rises is limited by the drop in the value of US dollar. Yet price rises will be stimulated by the changes in the excise tax rates in June and July as well as lifting the reduced value added tax rate on natural gas.

In the near future the impact of global prices is expected to diminish. According to the Food and Agriculture Organization (FAO), the price level has stabilized as of the beginning of the year. Sugar prices have gone down particularly rapidly in recent months: since the beginning of the year they have dropped by 26%. The price development in the future will be determined by the new harvests and FAO predicts that harvests are going to be good in Russia and Ukraine but worse elsewhere in Europe and North America. The global oil price hikes have also stopped and, after the drop at the beginning of May, stabilization is observed – albeit still at a high level. The pressure on prices could ease as a result of the expected decision of the Organization of the Petroleum Exporting Countries (OPEC) to step up oil production.

The stabilization of global prices is expected to soon find reflection in the Latvian price dynamics. Even though statistics indicate that real purchasing power has stopped to diminish, the high unemployment results in a weak pressure of demand on prices as evidenced by retail indicators. A previously unforeseen factor that could create a pressure on vegetable price drops in Latvia is the ban by Russia and some other countries outside the European Union on imports of EU vegetables after the breakout of an illness related to bacteria of as yet unknown origin.