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Wednesday 23.05.2018 | Name days: Leontīne, Ligija, Lonija, Leokādija

Economists: inflation to reach 5%

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The annual inflation rate of 4% slightly exceeds the previous forecasts; moreover, currently there are no projections that the inflation will not keep climbing, the economists believe.

Swedbank senior economist Lija Strašuna:

The food price surge turned out to be stronger than expected, however, slower than in January. Also, the fuel price growth slowed down. The global raw material price gains continue to be one of the key factors contributing to food and fuel price inflation. Since Latvia cannot influence the global prices, improving competition (e.g. by making more transparent pricing mechanism, starting with public procurements) is one of the options to reduce price increase pressure on the domestic market.

The domestic demand remains weak and it is not expected that this year it could significantly contribute to price gains. Still, sales campaigns are widely observed, not only due to seasonal factors: for some food products, housing maintenance and furnishing goods, as well as personal care products, etc, which reduce the increase in consumer prices.

If the planned tax raise is approved, then, most likely, the annual inflation rate will fluctuate around 4% in the remaining months of 2011.

When implementing the tax policy, it is necessary to balance the inflation and deficit reduction – the government’s resolution not to increase consumption taxes in 2012 is commendable, yet may prove to be insufficient, in order to reduce the inflation and meet the Maastricht inflation criterion. Whereas, if the tax cuts are considered, other measures will have to be implemented to reduce the budget deficit, namely, on the expenditure-cuts side.

SEB banka economist Dainis Gašpuitis:

As expected, food prices continue to flare up the inflation, particularly vegetables, milk, dairy products and fruits. Also fuel prices, recreational and cultural segment reported an increase. While the observed inflation rise was hindered by clothing and footwear seasonal sales campaigns, yet it will grow again with the arrival of new collections in the coming months. Heating prices also fell. Similarly, the implemented sales campaigns and discounts in many segments played a major role in hindering the inflation.

According to the forecasts, the annual inflation has reached 4%, indicating that its growth has not stopped yet. A sharp increase in inflation was also observed in both Estonia and Lithuania, where over the year prices rose by 5.7% and 3.1%, respectively. The previous trends in food price changes, determined by global trends, or food supply decline across the world, will prevail. High fuel prices will be maintained for some time due to the unrest and uncertainty in North Africa and the Middle East, which can also foster sharp price gains. Similarly, the inflation could spike by the end of sales campaigns and discounts, when the recent tax and traders’ markup effect could become more tangible. The overall assessment of the global price developments include the view that in the second half of 2011 the price surge will become more moderate, as well as the current food and oil surcharge is periodical and will not significantly contribute to price rises in other segments. However, the oil price development is accompanied by huge uncertainty, as well as climate conditions. If the weather is favourable and the harvest – good, the food prices will fall.

It is expected that central banks will take a more active role in combating inflation, while in Latvia the inflation will be kept up by tax and tariff increases. In other words, on April 1, the electricity tariffs will grow and their indirect effects are difficult to predict. Also starting with June 1, the scheduled tax changes in the consolidation package will be factors to maintain the inflation. If Latvia cannot influence the external processes, it is very important to maintain a balanced approach to the internal factor impact on the inflation and control it, in order not to endanger the current economic recovery. Despite the factors that foster inflation, its increase will not be disproportionate – it will be slowed down by a small salary growth, unemployment levels and low purchasing power.

DnB Nord Bank economic expert Pēteris Strautiņš:

The annual inflation rise to 4% in February certainly draws attention; however, nothing has happened particularly in this month; compared to January, prices increased by 0.3%, which is a very moderate price surge for this month – in the past ten years it accounted for 0.5% on average.

The fact that in February 2010 prices remained unchanged facilitated the annual inflation rate to reach the important psychological threshold. While in April and March 2010 prices rose by 0.5% and 0.9%, respectively; therefore, it is likely that the inflation rate will drop during the same months in 2011. However,the last year’s rather flat price level, will be overshadowed by the electricity tariff and tax change effects in July 2011. Also the price index will eventually reflect the surging oil and metal price influence. Meat prices will display the delayed effect of grain price growth; therefore, it would be too optimistic to claim that the inflation rise of 4% in February will be the highest point in 2011.

The service price deflation has certainly ended, as prices are slowly rising for the third consecutive month. This reflects both the growing price pressure and the economic activity recovery. The demand is not reducing anymore; consequently, the need to lower prices has declined. On the yearly basis, the service prices are lower, but this will not continue for long. The surge in price of goods has resumed already in January 2010.

There is high likelihood that Latvia will fail to comply with Maastricht inflation criterion in the second half of 2011 and early 2012. The reason for this will be the relatively high food and energy proportion in our consumer basket. However, if the global prices of these products stabilize or decrease, then for the same reason inflation in Latvia could even be lower than in the eurozone.

Latvijas Krājbanka chief analyst Olga Ertuganova:

Unfortunately, it should be noted that inflation expectations are rising, due to the external factors and rather unpredictable tax policy, as well as due to the announcements about energy tariff increases this year.

Of course, the main question is whether the sharp price increases during the last months will remain as a permanent trend, or whether it is a result of many factors, and the inflation will eventually calm down? To answer this question, first, again it should be noted that this time it is an inflation driven by supply factors, not demand. Consequently, the price growth is still to some extent limited by the inhabitants’ weak purchasing power. Of course, we cannot affect the global oil and grain prices, but given the weak demand, manufacturers and traders have relatively limited options for unjustified price increases. Unfortunately this works only in areas with high competition, so it is now essential to focus on competition issues, particularly in the trade sector.

In terms of global food and oil prices, their surge is now more affected by short-term factors – geopolitical tensions, natural disasters, major speculations on financial markets, etc. Therefore, it is very likely that with favourable weather conditions, as well as with the situation stabilization in the Middle East, the oil and agricultural commodity price pressures could ease off. Yet, the current trends will continue in the coming months, and the annual inflation in Latvia might approach 5% by the summer.

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