Global price fluctuations and tax increases triggered price gains in Latvia, however, oil and crop price still rank among the key factors boosting energy products and food prices either directly or indirectly, economists say.

Nordea Bank senior economist Andris Strazds:

As we had forecast, inflation kept climbing in May, reaching 5% on annual basis. Given the significant oil price fluctuation on the global markets and still growing food prices, the so called imported inflation, currently making up the biggest share of price gains, could drop soon.

Along with less impact of imported inflation in the coming months, the annual inflation could reach 4% or slightly above. Analysis of price gains components suggest the government has limited opportunities to influence price levels. Consequently, talks on a new inflation combat plan seem mere imitation of politic activities.

DnB Nord Bank economy expert Peteris Strautins:

The fact inflation hits 5% catches our eyes for sure. However, not all economic processes that seem interesting are important as well. The current price gains will play a minute role in the further development of Latvian economic recovery unless they trigger over-exaggerated politic counter-reaction, which could do more harm than the inflation itself.

Global price fluctuations and and tax increases boosted price gains. At the moment the only way we can reduce inflation is to make other prices drop rapidly to compensate for price climbs propelled by external factors.

Currently, the main thing is that the economy expands so that unemployment and emigration drop. Oil and crop price gains still rank among the key factors boosting energy products and food prices either directly or indirectly.

SEB Bank economist Dainis Gaspuitis:

The sharp price gains are mainly determined by such external factors as political instability in oil-exporting countries, weather conditions and speculation on global stock exchanges. While internal factors – primarily caused by tax increases – uphold the price surge, hampering domestic economic recovery.

Compared to the previous 12 month period, the average 12-month consumer price level hit 2.1% despite the annual inflation. This figure will determine Latvia’s price fluctuations compliance with the Maastricht criterion.

Currently, SEB bank forecasts 4.4%, based on more moderate price climb in H2 of 2011 than observed at the beginning of the year. The administrative impact on price gains will still prevail in June and July. Future price developments will be mainly determined by volatility in energy resource and food prices. The future outlook for food prices creates the biggest concern, as shown by the bad weather in the US and Europe. It is expected clothing prices could rise as well. The speculative influence should be considered as well, as it might increase the price volatility.

Whereas, energy resources price surge is likely to stabilize in the coming months. This could be fostered by the OPEC’s wish to prevent high oil prices threatening the global economic growth, as well as by the demand rate slow-down in Asia.

Also, the impact of unrest in the Middle East and North Africa on oil prices may have exhausted itself. However, the cause of the unrest – soaring food prices – will still remain there and may lead to further turmoil. For example, the investment bank Goldman Sachs has raised this year’s oil price forecast from 105 to 120 dollars per barrel, but the next year’s forecast – from 120 to 140 dollars a barrel.