Flash comment: Latvia - September 9, 2017
Price growth picks up again in August

As we expected a slowdown in inflation rate in July was temporary. In August annual price growth picked up again and was 3.1%. 

Food prices contributed the most to inflation growth in August. Among food prices, butter has been in the spotlight recently and the dynamics of global food prices in August is no music to one’s ears – butter prices have further increased. Relatively low global dairy production and rapidly growing demand for butter can explain the recent butter “fever”. Unfavourable weather conditions and dairy price drop a few years ago, which pushed some dairy farms out of business, account for limited dairy and butter supply. At the same time, both household income growth and growing awareness of food quality have led people switch from margarine to a more natural option – butter. Thus, demand for butter has surged. A similar story regards meat and its products. As incomes grow, demand for meat as such as well as for higher quality and variety products rises, propelling price growth. 

In the end of August hurricane Harvey stormed the US, sending fuel prices up. The impact on fuel prices in Latvia, however, has been limited and most probably will remain so. Brent crude price even declined amid news but rose eventually. But we do not expect major oil and fuel price volatility as a result of the hurricane. Both a partial shift to shale oil production and previous natural disaster experience have motivated some US oil companies to shift production to other US locations, but the move has been rather slow. This process has diminished global oil market’s reliance on the vulnerable Gulf of Mexico. The tendency is beneficial for Latvian households as well because it reduces dependence on price volatility. 

Outlook 

Inflation growth could slow towards the end of the year when prices leaped last year due to recovery in commodity prices. The average annual inflation could be around 3% this year and the next. The recent announcement of VAT rate reduction for vegetables, berries and fruits from 21% to 5% most probably will slightly slow price growth next year. But one must take into account that other factors affect fruit and vegetable prices as well. For instance, unfavourable weather conditions in Latvia and elsewhere in Europe have kept prices rather elevated. If this is the case next year as well, gain from the VAT reduction could be small. But inflation is just a part of the story. Both this year and the next wage growth will surpass that of prices. As a result households will be able to afford more goods and more services.


For more information please contact Ms. Linda Vildava, +371 67444213, linda.vildava@swedbank.lv 

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