Flash comment: Latvia - January 11, 2018
Average annual inflation at 2.9% in 2017

After four years of low headline inflation, year 2017 brought faster price growth. In line with our forecast, average annual inflation accelerated to 2.9% in 2017. Food prices, especially dairy, meat and vegetable, rose by 6% in 2017 and accounted for almost half of the price rise. The second biggest contributor to higher inflation was fuel prices which grew by 8.5%. Apart from those, telecommunication, insurance and dwelling service prices also pushed up average annual inflation. 

Outlook

This year average annual inflation will accelerate further, reaching 3.5%. The following factors will most likely be behind faster inflation: 

• Fast economic growth. Latvian economy will continue to grow fast this year which will take its toll on the labour market. Unemployment rate will fall further and labour shortages will be increasingly felt. In response to that, employers will have to pay higher wages both to attract new employees as well as to retain the existing ones. As a result upward pressure on inflation, especially service, will persist. 

• Minimum wage hike. After a few years of slower minimum wage hikes this year it is increased by 13%. Minimum wage hike will add to wage growth and will have a more pronounced effect on sectors with lower average wage levels, e.g. some service sector industries. Thus service inflation is expected to accelerate this year. 

• Oil price. Oil price has currently stabilized above 60 dollars per barrel and we expect it to remain above that level throughout the year. It means that fuel will be more expensive compared to last year. 

• Excise duty hikes. Faster alcohol and tobacco excise duty hikes will increase the prices of these products in not only in shops but also in bars and restaurants. Meanwhile, mineral oil duty hikes will increase the price of fuel in fuel stations. 

No doubt that faster inflation is no music to consumers’ ears. But the devil is not as black as he is painted – for most of consumers wallets will get thicker. Minimum wage hike and lower personal income tax rate could push average net wage growth above 10%. Consequently, purchasing power would growth by more than 7% – twice as fast as last year.


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

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