November inflation remained atypically low
In November, the annual inflation remained atypically low, returning to the negative range (-0.4%). The greatest negative impact was caused by a drop in heat energy and fuel prices.
An impact from seasonal price factors is not characteristic for November in the majority of goods and services groups. It was mostly felt in services related to tourism where the most rapid month-on-month drop in prices was observed.
Even though there was a seasonal rise in the prices of vegetables and potatoes, developments in the world's markets determined the overall stability of the food prices. According to the November data of the U.N. Food and Agriculture Organization, the prices of cereals, meat and dairy products remained stable, whereas the rise in the price of vegetable oil was compensated by a drop in the price of sugar.
The global oil prices currently exceed slightly the average level in October and November, and for that reason the drop in fuel prices that continued in November, could stop in December. Medium term expectations, however, are rather favourable, for Iran, Iraq and Libya could increase oil production, whereas the OPEC countries have agreed on a goal for 2014 – an unchanging production volume. As oil production increases, the prices of oil products and, correspondingly, that of fuel might again drop slightly.
Estimates by AS "Latvijas Gāze" indicate that, because of the drop in the 9-month average mazout price, the sales price of natural gas in Latvia could slightly drop in the coming months. That will have a favourable effect on the average heat energy price, which has dropped rather substantially over the course of this year. Currently, no active applying for new tariff plans has been observed with the Public Services Regulatory Commission and the novelty of this year – restructuring the production process by, e.g., expanding or starting co-generation – may have exhausted its possibilities of reducing tariffs in the near future. Thus heat energy prices in 2014 could retain a slight annual drop, but mostly under the impact of so-called base factors.
Overall, it is not expected that the level of annual inflation could remain this low (negative or close to zero). The impact of supply-side factors that was topical this year will gradually abate and in 2014, inflation will gradually come under the influence of a slight reduction of the tax burden on income and a slight increase in taxes on goods (CNG and tobacco).