Inflation reaches a new minimum

In October the average level of consumer prices in Latvia remained unchanged, with the prices of communication services, fuel, alcoholic beverages and seasonal tourism services dropping and those of foodstuffs and new season’s wearing apparel and footwear rising. Annual inflation reached its minimum level since autumn 2010, dropping to  1.6%. This indicator was smaller than expected as a result of competition among communication services and sales campaigns of sellers of alcoholic beverages as well as because of a greater drop in fuel prices.

The impact of consumer price groups on total monthly inflation and the contribution of core inflation, pp; %. 

Source: CSD, MPP calculations

The month-on-month rise in the prices of foodstuffs was determined by the rises in the prices of vegetables and potatoes as well as non-alcoholic beverages.  In the meantime, the average level of global foodstuffs prices has stabilized, with the prices of oils and fats dropping more rapidly and the prices of sugar and dairy products rising (FAO data). The grain prices no longer had a tendency to fluctuate substantially, since the active harvesting season in the Northern hemisphere has concluded and the amount of stocks is more or less known whereas the harvests in the Southern hemisphere will be up for evaluation in the first months of next year.

The October inflation was substantially impacted also by the seasonal rise in the prices of wearing apparel and footwear. The impact of this group of goods on the monthly inflation could lessen in the middle of the winter season during the period of sales.

Core inflation, however dropped and was negative both month-on-month and year-on-year and it was substantially impacted by the drop in service prices as a result of competition among mobile communications operators. The momentum of the prices of durable goods was also reflected in the drop in core inflation: although the indicators of consumer confidence have improved somewhat and durable goods were among those that supported a rise in retail trade shortly after the crisis, the population is not rushing to purchase furniture or automobiles and their prices dropped a little both month-on-month and year-on-year.

Not much fluctuation was observed in the oil market in October, and fuel sellers were gradually beginning to bring the fuel prices down in their points of sale. The impact of fuel prices on total inflation thus lessened both month-on-month and year-on-year reaching minus 0.1 percentage points and 0.4 percentage points of total inflation respectively.

In contrast to several other years, when the new heating season in October brought higher thermal energy tariffs, this year the average thermal energy tariffs remained unchanged. The tariff plans submitted to and approved by the Commission for Regulation of Social Services (SPRK) indicate that over the next few months it is the impact of the prices of water supply and sewerage on inflation that is more likely to increase, yet at the moment mainly the tariff plans of small local public utilities providers have been submitted and their combined impact on inflation could be rather negligible. Some producers of thermal energy have found opportunities to even bring their tariffs down. In Liepāja and Ikšķile the new reduced tariffs have already taken effect whereas in other municipalities, e.g., Jūrmala and Iecava, they could drop over the next few months.  

The 12-mongh average inflation in October continued to drop reaching 2.7%. As there are no important inflation-driving risks that would result from domestic economic structure or policies (taxes, salary pressure), with inflation remaining stable over the next few months, the 12-month average rise in consumer prices could drop even substantially lower, approaching a 2% level (i.e. with the impact from raised global prices and indirect taxes that dominated the end of 2011 and first months of 2012 fading).

The inflation dampening factors in October were in part one-off and in part longer lasting (e.g. communication service prices) and thus they could bring down inflation somewhat in the coming months in contrast to earlier scenarios.