LATVIA – Citadele Bank economist (10/2022)
According to Martins Abolinsh, inflation may reach 25% by the end of the year in Latvia, but there is good news. Inflation in the world is no longer a one-way street and the skyrocketing prices of natural resources have at least partly stopped, and the prices of some resources, such as metals and foodstuffs, have even started to decrease.
Energy prices are still very high in Europe, and It is only now being fully reflected in our heat tariffs. In September, heat prices in Latvia increased by 9.2% and, compared to September 2021, increased by 58.7%. On the other hand, inflation for electricity, gas and solid fuels in September was in the range of 90-110%. Similarly, in September food prices increased by 1.9%, and the annual inflation for foodstuffs reached 27.7%.
Inflationary processes are also increasingly visible in the service sector. For example, the prices of recreational and entertainment services have increased by 7.8%, education – by 7.1%, and accommodation and food – by 15.9%. Compared to the previous year, prices of all services in Latvia in September have increased on average by 9.7%.
Inflation in Latvia may reach 25% in the rest of the year, and it may finally start to decline early next year. Globally, natural resource prices are no longer rising, and since the peak of spring, prices of food, metals and also oil have fallen by almost 20% globally.
Inflation is also constrained by the European Central Bank’s monetary policy and rising interest rates in the eurozone. This is necessary to keep inflation from becoming persistent, but OPEC+’s decision to cut oil production has again driven up oil prices and will make it more difficult to fight inflation.
New orders from Latvian industry are already decreasing, high food and energy prices are reducing the purchasing power of the population, and this is increasingly being felt in various trade and service sectors. Also the situation on the labour market is gradually starting to deteriorate, so the next 6-12 months will be difficult for the Latvian economy.
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