Flash comment: Latvia - January 11, 2019 CPI
Average annual inflation was 2.5% in 2018

Average annual inflation was 2.5% in 2018 driven largely by external factors. Transport and housing goods and services accounted for approximately half of the price growth, owing mainly to higher energy prices. Despite Brent crude oil price per barrel (in euros) trending downwards at the end of the year, the average price was still 25% over the year. Coupled with fuel excise duty hikes average fuel price growth was 12.5% in 2018. Solid fuels were 17% more expensive in 2018 mainly due to higher wood product prices. With waste management tariff hike and water supply and sewerage tariff hike in Riga price of these services rose 5% on annual basis. Gas was around 5% more expensive while heat – around 2% in 2018.

 

Food price growth amounted to less than 1%. Significantly slower food price growth in 2018 compared to 2017 was one of the main reasons behind slower overall price growth (2.5% vs 29% in 2018 and 2019, respectively). Lower global food prices and VAT reduction for fruits and vegetables common in Latvia determined the price slowdown. 

As a result of excise duty hikes, alcohol and tobacco prices grew by 4% and contributed to the price growth albeit to a lesser extent than transport and housing segments. Additionally, various services became more expensive with insurance (29% over the year), out-patient (6%) and catering (3%) services contributing the most to overall price growth. 

Taking into account a more moderate inflation rate and more rapid wage growth in 2018 compared to 2017, 2018 was a beneficial year for household purchasing power growth. 

Outlook 

This year will most likely bring similar average annual inflation as in 2018. Housing goods and services are expected to lead the overall price growth. Natural gas, electricity, heating and waste management will all become more expensive. It could be expected that moderate food price growth will lift the overall price level similar as alcohol and tobacco price growth, pushed up by excise duty hikes. Higher costs, partially due to strong wage growth, could be reflected in higher service prices. Meanwhile, should the oil price remain at the current levels, fuel prices will decrease and somewhat limit price growth. 

Overall, 2019 will most likely be another rather good year for households with average wages growing faster than average prices.

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

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