Inflation down to 1.9% in June

The annual inflation in June continued down reaching 1.9%. Within a month consumer prices dropped by 0.1%. Domestic factors that resulted in a drop in the annual inflation were driven by the so-called base effect – in June of last year the excise tax was raised for several products and that affected the annual inflation level for 12 months. The monthly and annual inflation in June of this year were also positively affected by the global price dynamic: global food prices dropped by 1.8% (the greatest drop was observed for oils), whereas the month-on-month drop for oil prices reached 13.6%. The impact of these price changes was partially observed in Latvian consumer prices as well: fuel prices have dropped by 3.6%. The month-on-month rise in food prices was seasonal in character. That was mostly driven by the appearance of the new seasonal harvest of potatoes on the market with the related high price.

Figure 1. World food and oil price developments (Jan2010 = 100%)

Source: FAO; Reuters

A rather small pressure of demand side on the consumer price dynamic was evidenced by annual core inflation's drop to 0.7%, raising the overall inflation by a mere 0.5 percentage points (Fig. 2). The drop in core inflation was primarily affected by goods' prices: in the group of alcohol and tobacco it was affected by the base effect of the excise tax and prices dropped also of "other tradable goods". The prices of services whose prices are not regulated, however, rose by an average 0.7% month-on-month that could be partly explained by the impact of seasonal demand on the prices of hotel and restaurant, as well as tourism services, yet this time the price rise is greater bringing up the annual inflation level as well. If we look at the near future, the consumer confidence indicator in June has improved that points to increased expenditures, yet inflation expectations have abated as the consumers have felt the drop in fuel prices and are expecting the impact of the reduced VAT on the price level.

Figure 2. The structure of the annual rise in consumer prices, in percentage points

Source: CSB, BoL calculations

The level of annual inflation in July could still drop a little lower. That will be determined by the reduced VAT and the average fuel prices may still remain under the June average. The seasonal sales of wearing apparel and footwear have started up in places and in July are likely to affect the monthly inflation. Depending on the amounts of discount compared to July 2011, the annual inflation may also go down. In the direction of increase, prices will be affected by the rise in the prices of natural gas and the related thermal energy tariffs. This will not really be seen in the structure of expenditures for the active heating season has yet to begin.