Inflation growth moderates at the close of the year

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In December, annual inflation declined also on account of the base effect of the fuel and food price rises observed at the end of 2016.

In monthly terms, prices of non-food goods posted merely a minor drop, while those of services increased. The above changes did not affect the average price level, therefore it remained the same as in November.

According to Central Statistical Bureau data, annual inflation stood at 2.2% in December, remaining broadly unchanged month-on-month (0.0%). A decline in annual inflation was observed both with respect to goods and services. In December, it was the non-food goods that became slightly cheaper (-0.5%), while services grew marginally more expensive (+0.5%).

Although prices for some groups of food products still remain high in annual terms (+13.7% for milk, +55.8% for butter), last few months have seen more moderate price rises or even a fall in them. This can be explained by both global changes in food prices and the impact of the domestic market factors, e.g. a drop in purchase prices of milk was observed in January. Overall, the rise in food prices in annual terms is no longer so pronounced either (+4.3% in December).

Service prices moved up by 0.5% in December posting the first increase in four months. Referring to the previous commentary, probably this could be seen as a signal suggesting that service prices are on the rise due to the demand driven by the rapid increase in wages in Latvia. In annual terms, however, service prices have seen slower growth than a year ago, e.g. 2.6% and 3.4% respectively. As to global oil prices, they continued on an upward trend in December on account of several factors. Despite an increase in the US oil production activity, the global accumulated oil stocks are declining as a result of the curbs on oil output by the Organization of the Petroleum Exporting Countries (OPEC). Unrest in Iran, one of the largest and strategically most important OPEC members, also represents additional risks affecting oil price as well. At the end of December 2017, the price of Brent crude oil futures reached 67 USD per barrel.

Based on the official statistics for December 2017, the average annual inflation rate is also available: it is 2.9% and corresponds to the forecast released by Latvijas Banka already in June.

Latvijas Banka's inflation projection for 2018 is 2.9%. However, if the oil price stabilises at levels above 60 US dollars per barrel, inflation may slightly exceed the expectations.

Chart. Annual inflation, contributions by consumption group (percentage points)

Annual inflation, contributions by consumption group
Source: Latvijas Banka


APA: Pone, K. (2020, 26. nov.). Inflation growth moderates at the close of the year. Taken from https://www.macroeconomics.lv/node/4017
MLA: Pone, Kristofers. "Inflation growth moderates at the close of the year" www.macroeconomics.lv. Tīmeklis. 26.11.2020. <https://www.macroeconomics.lv/node/4017>.
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