On Inflation in January 2009
In January of 2009, annual inflation continued to subside and stood at 9.8%; month-on-month, consumer prices increased by 2.2%. In January, consumer prices increased mainly on account of the raised VAT rate. Given a rapidly declining demand, the changes in the VAT rate were reflected in the changes of the consumer prices only partly. Inflation has been climbing also on account of a larger weight of the housing expenditure in the consumer basket. At the end of 2009, inflation in Latvia could possibly drop to the low rates of the West European countries; thus, from the inflation aspect, the changeover to the euro might take place as early as in 2011. However, the actual date of the changeover to the euro will largely depend on the ability of the government to balance the government in a way that it becomes compliant with the Maastricht fiscal criterion.
With the purchasing power deteriorating and competition toughening, businesses would rather compensate for the changes in the VAT from corporate profit than increase prices. For example, the prices of footwear and clothing have declined markedly since December (by 7.0% and 5.6% respectively) despite the increase of the VAT rate. Nevertheless, the housing-related payments went up significantly as a result of the rise in the tax rates – water supply by 16.3%, garbage collection by 16.6% and sewage services by 16.8%. Food prices increased as a result of the changes in the VAT rates, for bread (3.5%), fish (3.6%), as well as meat and meat products (2.1%) in particular. In January, also the excise tax rates on tobacco witnessed an increase, with tobacco prices growing by 7.0%; however, this price rise might not yet reflect the changes in all excise taxes.
The weights of consumption groups that are used for the purpose of inflation calculations have been revised on the basis of the consumption patterns in 2008. With the fast pickup of gas, heating, electricity, as well as utility service tariffs in 2008, the weight of this group of goods and services in the consumer basket has increased notably. The weight of fuel in the consumer basket has declined as a result of the rapid price fall at the end of the last year.
In January, core inflation continued to moderate and was 6.1%.