Producer competitiveness improving further

The deflation of producer prices, though still pronounced, nevertheless subsided further, and a 6.6% year-on-year price fall was recorded in January. Deflation moderated mainly as an effect of supply or cost factors. In particular, with external demand gradually recovering and world prices on metals and energy moving up, the decrease of producer prices, especially on export goods, lost momentum. However, this does not imply a halt to the downslide of producer prices. At present the domestic demand, so far very week, imposes a strong downward pressure both on consumer and producer prices. Moreover, given the continued decline of domestic labour costs, the downward pressure on prices is expected to persist, especially domestically.

Though producer price deflation has lost some of its vigour in the recent months, last year producer prices in Latvia have decreased faster than in the trade partner economies, thereby further strengthening of our producers' competitive power in export markets. The real effective exchange rate of the lats*, calculated on the basis of producer prices in manufacturing, posted a 1.9% annual decline in November and a 8.0% decrease since its peak in January 2009.

* The real effective exchange rate is an indicator describing the Latvian producer price competitiveness in export markets. It is measured as a change of the nominal exchange rate of the lats against the currencies of the major trade partners, and is also based on inflation rate movements in Latvia and trade partner economies. An appreciation of the exchange rate signals deterioration in price competitiveness. Yet, it is hardly the sole indicator characterising competitiveness: there is also quality, brand recognition to name a few.