The price level remained unchanged in January
According to the data by the Central Statistical Bureau of Latvia (CSB), annual inflation stood at 2.0% in January, remaining broadly unchanged overall month-on-month (0.0%). A decline in annual inflation was observed with respect to goods, while services grew more expensive. Non-food goods became slightly cheaper
(-0.1%), while services got more expensive (+0.2%) in monthly terms.
The minimum wage was raised and several changes in tax rates came into effect as of January 2018. Higher excise tax rates on petrol (+7.8%) and diesel fuel (+11%) as well as a lower value added tax (VAT) rate on fruit and vegetables typical of Latvia (currently standing at 5%) have been the most significant contributors to inflation. It is obvious that the price level had no marked changes in January, pointing to currently existing factors with opposite effects (e.g. rising oil prices, poor harvest, the euro/US dollar exchange rate etc.). However, it does not mean that these changes are unlikely to affect inflation in the future.
Looking at each change separately, the increase in the minimum wage exerts pressure on the fast rising labour remuneration having the most direct impact on service prices. In January, service prices have increased by a mere 0.2% in monthly terms and by 3.3% since last January. If it was previously assumed that service prices had already started to be affected by demand pressures, it can be currently concluded that, contrary to several driving factors, the price "spring" has not been compressed completely and a faster rise in service prices might be observed at a later point.
In January, petrol and diesel prices increased by 3.9% and 3.6% respectively, inter alia, on account of higher excise tax rates. This will also have an impact on the prices of other goods and services in the coming months. Global oil prices likewise witnessed a rise in January, with the price per barrel of crude oil sometimes even exceeding 70 US dollars. Nevertheless, this price hike does not have a direct impact on energy and fuel prices in Latvia as it is offset by the appreciation of the euro vis-à-vis the US dollar.
Looking at the near future outlook, the scenario with the rapidly growing extraction volumes of shale oil in the US has come true. Most recent data point to underestimated extraction volumes in the previous months: they already exceed 10 million barrels per day at the current moment. Similarly, slower growing than expected oil consumption is expected on account of higher prices. In the future, the Organization of the Petroleum Exporting Countries (OPEC) could review extraction policy decisions that might affect the oil price dynamics observed over the past months.
In January, food prices in Latvia shrank moderately (by -0.2%), while remaining unchanged in global terms, with the food price index established by the Food and Agriculture Organisation (FAO) remaining at the level registered in December. Looking at the reduced VAT rate on fruit and vegetables typical of Latvia, it is too early to draw unambiguous conclusions as there are a range of other factors which influence food prices (e.g. the harvest affected by unfavourable weather conditions and the rising energy and fuel prices) and which are later reflected in storage and logistics costs.
Overall, it can be concluded that the previously observed decline in inflation continued in January. Although changes in tax policy came into effect and the minimum wage was raised as of 1 January 2018, its impact on inflation will show up with a lag both due to indirect effects and the currently existing opposite effects.
Chart. Annual inflation, contributions by consumption group (percentage points)