Producer prices up slightly in June

In June 2012, the producer prices went up slightly in Latvia (by 0.2%), but the rate of their annual increase continued to drop, reaching 2.3%.

Figure 1. Changes in producer price index, %

It was the rises in producer prices in food and energy production that were the major contributor to the month-on-month rise in producer prices, despite the downward trend in global raw materials prices (the main agricultural and food products as well as oil), and the  producer prices in these branches rose more rapidly for the export market. Food production for the domestic market appreciated 0.8% month-on-month and for the export market by 1.5%, whereas energy production appreciated by 0.4% overall and for the domestic market by 0.2%. Thus, it seems safe to assume that production in the electrical power, gas supply, heat supply and air-conditioning, which is export market directed, has appreciated more, but detailed data are not available. It is true that energy is not the main branch oriented toward export but the rise in the overall producer price index for exported goods is more rapid than for products sold domestically (0.3 and 0.1% respectively), with the trends in mining and quarrying differing markedly between both markets (0.7% price drop for the domestic market and an 0.9%  rise for the external market) as well as those in water, waste water and solid waste management  (price drops for both markets, yet the one for the domestic market is greater).

Such differences in price changes in the production for the domestic and external markets may be caused by differences in assortment. Comparison with some of the trading partners imply that price changes in June were not beneficial in Latvia in terms of competitiveness: in Estonia, which has published data on the producer price dynamic the overall producer price level has not changed and has dropped substantially in Lithuania, particularly for goods produced for export. The impact of the oil processing industry is relevant here but the export production in other branches also depreciated in Lithuania. These are short-term fluctuations, however, and they do not signal a change in the competitiveness trend.

In July, oil prices resumed rising in the global market and, since no quick resolution either for the EU sanctions against Iran or for the political turmoil in Syria can be found, uncertainty remains high in the oil market. In the meantime, the first signs that some agricultural crops are suffering from draught are appearing: the prices of soy and maize in the US have for this reason reached a very high level and may have a detrimental effect both on the prices of replacement products and on the related branches where soy and maize contribute to a substantial part of the costs. No substantial drop in producer prices can be expected in Latvia in the near future. Yet the competitiveness of our enterprises may not suffer substantially if the global prices have a similar effect on the production costs in our main trading partners.