Flash comment: Latvia - December 8, 2017
Annual inflation slowly retreats

For the third month in a row inflation slowly recedes. In November, annual inflation rate was 2.7%. Despite retreating inflation, it is considerably higher than a year before. In the eleven months of this year, annual average inflation was 3.0% (for the whole 2016, it was 0.1%). Higher commodity prices (e.g., global food prices were 9% higher in the eleven months of 2017 compared to the same period in 2016 while Brent oil price in euros was 21% higher), cyclical upswing, and labour market tightening determined the acceleration of inflation this year. 

It’s the most wonderful time of the year – Christmas!  

Christmas is approaching which for many mean higher spending. What to expect as we get ready for the celebration? As data about the first eleven months of this year suggest, a traditional Christmas dinner as well as recreational and cultural activities will be more expensive than last year while some presents (e.g., games, toys) – a tad cheaper. However, despite costlier food and leisure this year we can afford to buy more. The average monthly net wage has grown faster than inflation, thus consumer purchasing power has increased. 

Next year wages will be racing ahead of inflation 

As the cyclical expansion continues and labour market keeps tightening, inflation will not step back. Robust growth and falling unemployment will make labour shortages more heartfelt. It will contribute to further rapid wage growth which in turn will keep inflation elevated. The tax reform will play a role too. From wage perspective, a larger minimum wage hike compared to previous years will add to the average wage growth – both gross and net. Additionally, personal income tax reduction will leave more money in consumer’s wallets. However, the tax reform also envisages across the board excise duty hikes. Taking into account all these effects, next year the gross wage growth is expected close to 10% (net – above 10%) while annual average inflation – around 3.5%. As average wage is anticipated to grow notably faster than inflation, consumers will be able to buy more than this year.

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


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