Flash comment: Latvia - September 8, 2015
Annual CPI inflation at 0.1% in August
  • Goods’ prices down by 0.7%, prices of services up by moderate 2.4%
  • Monthly deflation at 0.5% due to cheaper fuel and vegetables
  • The average inflation is expected at 0.5% in 2015

Consumer prices declined by 0.5% in monthly terms, as expected. The usual seasonal drop in the prices of vegetables and potatoes (by 17.3%) and a fall in fuel prices (by 5.4%) were the largest contributors to the monthly deflation. Monthly deflation was reduced mostly by 3.6% more expensive alcohol products due to an excise tax hike as of August 1st.

Annual consumer price growth stood at very moderate 0.1%. The strong wage growth continued to support the increase in the price of services (2.4%), e.g., hotels and restaurants (3.4%) and hairdressing (3.1%). Prices of goods were by 0.7% lower than a year ago. Food was by 1.4% cheaper, mostly due to a 13% drop in milk product prices. Lower oil prices (by 45% annually in euro terms) contributed to the decline in the prices of fuel (14.2%), heat energy (11.8%) and natural gas (9.5%).

One of the current proposals for raising next year’s budget revenues is an increase in the excise tax for fuel products. If the increase is a must, then currently it might be a good time for it to take place. Brent oil price in euro terms in August has reached the lows of the beginning of 2009, and the lower oil price has dragged down the fuel prices in Latvia. Thus, an increase in the excise tax would currently be less painful to consumers. Besides, we do not foresee a sharp increase in oil prices in the nearest years. However, risks to competitiveness must be considered, since the tax hike would result in a higher energy costs for enterprises (e.g., an analysis of current/planned tax rates in the neighbor countries would be necessary).

Overall price growth this year is expected to be very humble; Swedbank forecast for average inflation this year stands at 0.5%.

For more information please contact Mr. Andrejs Semjonovs, +371 67445844, andrejs.semjonovs@swedbank.lv

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