Inflation bites painfully in Latvia, and not just on account of energy prices

Currently, with the average remuneration level increasing and production costs on the rise, inflation is driven both by demand and supply factors. In November, its annual rate of increase already reached 7.5%.

As the remuneration of employees moves up, so does demand and production costs, thereby supporting price rises. The high energy and raw material prices and the globally observed supply chain disruptions also push up costs. It is a difficult time for manufacturers and buyers. With manufacturers adapting and transportation capacity increasing, the supply chain bottlenecks are expected to disappear over the next year, allowing for easier (and cheaper) access to raw materials, as well as enabling exporters to deliver their products to customers.

However, the hottest issue now is energy prices. If recently a lot of people were closely watching the latest Covid-19 daily statistics, at present the energy prices on the Nord Pool Latvian exchange area attract increasing interest, and their new peaks are reported quite regularly. With colder weather setting in and the darkest period of the year approaching, energy and heating prices are becoming increasingly topical. Over the recent months, the weather conditions have not been favourable for the production of alternative energy; in November, the hydroelectric power generation was also relatively low in Latvia. Moreover, the situation has been aggravated by both global factors (increases in the prices of natural gas, coal and CO2 emission quotas) and developments in our neighbouring countries, i.e. restrictions on energy imports from Russia and Belarus imposed by Lithuania.

Energy prices have also been very volatile previously, and several of the above factors affecting energy prices may change, e.g. favourable weather conditions could increase the alternative energy contribution to supply; also, data on energy futures point to market expectations of a fall in their prices.

In the next few months, we will still face a relatively rapid price rise; however, analysis of the contributing factors suggest that it might moderate over the next year.