Inflation is rising but, to a great extent, owing to last year's 'laurels'

According to the data of the Central Statistical Bureau, the consumer price level in September was by 0.5% higher month-on-month and by 0.6% higher year-on-year. This dynamic in part resulted from last year's developments, for instance, in the second half of   2015, the drop in energy prices in the world market intensified and thus, against the backdrop of these prices, the current energy prices are not much lower. That is, their negative contribution to the 12-month inflation has considerably diminished. However, several inflation-raising factors are at work this September, mostly on the supply side. 

In September the monthly inflation in Latvia was positively impacted mostly by those supply-side factors that result from the global resources price trends. For several consecutive months now, food prices, including the prices of dairy products, have been continuing to rise. The milk purchase price rises have resumed in Latvia as well, and that leads to a gradual rising of the average consumer price level. The impact of these factors on inflation could grow in the fourth quarter.

The annual drop in energy prices has also diminished substantially and, against the background of the low base of last year, an even positive energy (e.g., fuel) price contribution to inflation could be expected during the next six months.  In September, the month-on-month inflation also resulted from the seasonal rise in the prices of wearing apparel and footwear. Characteristically for September, the education service prices also rose slightly.

The 12-month inflation in September rose to 0.6%, and its increase was substantially impacted by the drop in the negative contribution of energy prices. A similar impact was felt also from the monthly trend in food prices, which this year was different from that of last September (then they dropped under the impact of global prices whereas this year they rose). The negative contribution of clothing and footwear prices to the 12-month inflation diminished: these prices rose slightly faster than last September. Similar to the month-on-month inflation, the education service prices had a small positive contribution.

Yet the September data on consumer confidence indicate for the first time since the economic crisis that the population expects a drop rather than rise in prices in the next 12 months.  Even though such a feeling regarding the future price dynamic does not correspond to many actual developments affecting the price level (e.g., the rise in indirect taxes, halting drop in energy prices, food price appreciation, rise in some regulated prices), it may have resulted from the slowing economic growth.

This year's economic growth projections by Latvijas Banka have been reduced to 1.4%. More pessimistic employment expectations are reflected in consumer confidence indicators.  Thus on the demand side, a wait-and-see position is likely, which will not foster a fast rise in inflation in the coming months. 

APA: Paula, D. (2022, 27. may.). Inflation is rising but, to a great extent, owing to last year's 'laurels'. Taken from https://www.macroeconomics.lv/node/1868
MLA: Paula, Daina. "Inflation is rising but, to a great extent, owing to last year's 'laurels'" www.macroeconomics.lv. Tīmeklis. 27.05.2022. <https://www.macroeconomics.lv/node/1868>.

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