Inflation is on the rise, as expected

According to the Central Statistical Bureau data, the consumer price level in October was 0.8% higher than in September and 1.0% higher than in last October. As was expected following the global trends in resource price developments and the development of purchasing prices of selected agricultural products in the previous months here in Latvia, the increase in inflation was on account of the impact from oil prices seen in fuel prices (+4.2% within one month) and the rise in prices of several food products.  

Although the impact on monthly and annual consumer price changes is still largely determined by different supply-side factors affecting consumer prices directly, core inflation is also accelerating, pointing to stronger effects of costs rather than the sustainability of demand. 

Seasonally volatile prices of groups of goods and services such as wearing apparel and footwear, accommodation services, passenger transportation services by air and even fresh vegetables recorded a higher month-on-month increase (or a lower month-on-month decrease) this year in October. The prices of cultural services likewise grew at a faster rate, with a more rapid month-on-month rise in October signalling a slight increase in annual inflation.

As current prices of the most popular (day-to-day) goods such as food and fuel go up, inflation expectations have also grown considerably according to the European Commission's Consumer Survey data for October. This has, as if, improved the situation seen in September when they fell to a hard-to-explain negative value, thus slightly exceeding the average level observed in 2015.  

Inflation is still most likely to rise due to the fading out of the declining effect of commodity prices in the coming months. However, the supply-side factors, including institutional factors, will remain in the highlight and largely continue to determine price dynamics also next year, mainly affecting the costs of producers or service providers. The cost factors are more likely to support core inflation next year in contrast to the fact that they have prevented a rise in the prices of consumer goods and services groups constituting core inflation for several years despite a steady increase in income.

The costs of producers and service providers will be affected by factors such as changes in the natural resources tax rate in Latvia still being discussed by the Saeima, the persistent trend of the global food price rise following a fall observed for several years before, and oil prices that recorded a rise in October, while are still surrounded by a significant degree of uncertainty in the future. Similarly, producer costs may also be affected by the still unclear differentiation of the mandatory procurement component (MPC), based on different consumers' consumption, the minimum social contributions as well as minimum wage increase. 

Meanwhile, opposite factors will also affect the same spending items with respect to both households and enterprises. For instance, the electricity price already incorporated in the power supply contracts proposed to the households for the next year, is slightly lower than it was last year. At the same time, JSC Augstsprieguma tīkls has submitted its tariff plan providing for a rise in transmission services tariffs to the Public Utilities Commission (PUC). This will of course not affect the consumers' overall electricity costs until JSC Sadales tīkls has revised the distribution system services tariffs according to the price of transmission services.

Due to an exceptionally low investment contribution, this year the growth rate of the Latvian economy could be the lowest over the past 5–6 years; however, with the impact of the use of the European Union funds increasing, the economy will develop more dynamically next year, and the influence of the demand side on inflation is also expected to strengthen gradually. Meanwhile, growth in lending activities could also be expected in the household sector next year, fostering the demand for, e.g. goods and services related to house furnishing. However, despite an increase in remuneration in some public sector areas discussed in the budget planning process, there is no reason to expect an overall significant rise in the average remuneration growth rate and the disposable income of households. Thus, even though the average annual inflation growth is expected to exceed that of this year more than by 1 percentage point, it will only be partly stimulated by the rise in purchasing power.