The short period of deflation is over, yet this year, unusually low inflation is expected

The slightly positive (+0.2%) annual inflation in June 2013 mostly reflected the base effect of the prices of unprocessed food: in last May-June, a short-lived rapid drop in world food and agricultural prices was observed, but this year it was much smaller. Yet the impact of the other factors in June of this year was still expressed as a year-to-year drop.

The food month-on-month price rise in June was primarily caused by seasonal factors, for example, the price of potatoes rose by 51.2%. The rise in prices for tourism services could also be related to the impact of seasonal factors, yet that did not come anywhere close to the rise a year ago, and, year-on-year, these prices have even dropped, possibly as a result of a smaller cost pressure. The impact of the seasonal sales of wearing apparel and footwear on the price level was more pronounced than in June of last year, maintaining negative annual core inflation. As the drop of oil prices in the world market abated (by 0.2% over a month), the average fuel price grew, yet its level remained lower that in June of 2012.

The world food price dynamics remains favourable – the previously fast growing prices of dairy products went down in June for a second consecutive month and in the other largest groups of agricultural and food products no rapid price changes were observed. This year’s grain harvest is expected to be better than in the 2012/2013 marketing year, and that could have a favourable impact on price dynamics. Meanwhile, from the point of view of world prices, oil price risk has increased. Even though the price of oil is lower than at the beginning of the year, the political events in Egypt are complicating estimates of oil prices for the coming periods after several months of a rather stable situation in the oil market. Thus the risk of external factor impact of duel price dynamic in the future can increase slightly in Latvia as well.

Domestic factors meanwhile do not point to a substantial pressure on prices. Albeit the rate of economic growth has been slightly faster than was expected at the beginning of the year and, before euro introduction, one cannot exclude the possible wish of consumers to shop more than usual, the previously mentioned factors that act in the direction of price reduction are persisting and increasing: e.g., the drop of heating energy prices because of the so-called non-oil factors (new tariffs for producers that move to cogeneration or are modernizing production) and measures that are taken to limit rises in consumer prices in the euro introduction period – monitoring of consumer prices and the initiative “An Honest Euro Introducer”. Thus this year’s average annual inflation will be unusually low in the conditions of positive economic growth.