FM: Inflation in Latvia Gradually

Consumer prices in Latvia have dropped by 1.0% in July this year, according to the Central Statistical Bureau. In July, consumer prices generally record the largest year-on-year decline, driven by seasonal factors, and this year has been one of the fastest.

Compared to June, prices for clothing and footwear decreased the most by 8.3%, as a result of summer season sales. The drop in food prices by 1.2%, in particular the drop in vegetable prices by 9.4%, also had a significant impact on the overall drop in prices this July. Price changes in these two commodity groups account for most, or 0.74 percentage points, of the total drop in consumer prices in July this year. Among other groups of goods and services, prices for housing and transport related goods fell month-on-month, while those for recreational and cultural goods, alcoholic beverages and tobacco rose in July.

Compared to July of the previous year, consumer prices continued to rise and the overall price increase was 2.9%. It was 0.1 percentage point lower than the previous month, thus inflation in Latvia is gradually decreasing. In July, as in June, the strongest impact on the overall price increase was due to the 4.7% rise in food prices. Among food groups, the fastest price increase in July was recorded for pork (+ 11.2%), flour and other cereals (+ 14.5%), fresh vegetables (+ 19%) and potatoes (+20.6) compared to July of the previous year. %).

In July, prices for alcohol and tobacco were also recorded. The 5.7% rise in the price of alcoholic beverages was driven by a higher excise tax rate, which came into force in March this year. By contrast, in the coming months, changes in the price of alcoholic beverages will be affected by the 15% reduction in excise duty on spirits, which took effect in August this year. In July 2018, however, the base effect of the increased excise duty rate on cigarettes did not disappear, as in July this year the increase in tobacco prices was similar to that observed in previous months (+ 5.6%). 

The rate of increase in the prices of housing-related goods and services has slowed down to 5.7% on average in the first half of the year, while in July this year the prices of these goods and services increased by 2.7%. The biggest price increase was caused by the 10.5% rise in electricity prices. Waste collection prices continued to increase at a similar pace to previous months of this year, rising by 16.1% due to increased tax rates on waste disposal starting in January this year. At the same time, natural gas prices in Latvia decreased by 9.4%, as the new gas tariffs were revised and updated in July this year. It is related to the oil prices in the world stock exchanges, which in the first half of this year were lower than last year, thus affecting the natural gas prices in Latvia. It should be noted

In July, prices of recreational and cultural goods and services also recorded a 3.1% year-on-year increase. In addition, restaurant and hotel services went up in price by 4.8%.

By contrast, prices for transport-related goods and services were 0.2% lower in July than in July last year, driven by a 1.0% drop in fuel prices. This is the first fuel price drop since September 2016, and given the declining oil prices in the world, fuel prices should continue to fall in the coming months. For example, according to the latest stock market information, Brent crude oil price in the first week of August 2019 was almost 20% lower than a year ago.

In the first seven months of this year, the inflation rate in Latvia reached 3.1% and was still mainly affected by the rise in prices of housing-related goods and services. However, given the lower natural gas tariffs in the second half of the year, this impact should diminish in the coming months. Inflation is expected to continue to decline in the second half of the year, in addition to lower excise duty on strong alcohol as well as lower oil prices. According to the forecasts of the Ministry of Finance, average inflation in Latvia this year will be 2.8%.




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