Flash comment: Latvia - August 8, 2016
Six months spell of annual consumer price deflation ends in July

Compared to June, consumer prices shrunk by 0.3%, but were up 0.1% annually. This ended a six month long annual deflation spell in consumer prices. On monthly basis, among the key drivers were the Value Added Tax raise for housing services that pushed prices up and a decrease in petrol prices due to the recent oil price decrease. 

Overall price level dynamics were driven by two general trends. First, seasonality – e.g., with the new harvest vegetable prices decreased as did the prices of clothing and footwear during the summer discount season. Second, goods prices continued to decrease (down 0.9% YoY) whereas services’ prices continued to rise (up 2.7% YoY). Goods prices largely reflect global processes and imports of deflation. Services reflect more of idiosyncratic local features, e.g., (i) tax and administrative price changes, and (ii) growing incomes. Wages and incomes have kept growing while willingness to make large purchases or take on mortgage debt remains subdued. Deposits at banks are briskly growing. Instead, consumers opt to treat themselves with smaller purchases of services. Hence arts, entertainment and recreation sector lately has been one of the most robust and fastest growing sectors in the economy. 

Outlook: back to positive numbers but still low inflation 

Unless oil prices surprise with further decreases, annual inflation is set to pick up and permanently return to positive territory. Due to the extended deflation period earlier in the year, for 2016 overall annual consumer price inflation will be around zero.

For more information please contact Mr. Mārtiņš Kazāks, +371 67445859, martins.kazaks@swedbank.lv 


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