Flash comment: Latvia - January 12, 2016
Consumer prices increased by 0.2% in 2015
  • Goods’ prices down by 0.7%, prices of services up by 2.6% on average in 2015
  • Annual inflation supported by more expensive electricity while limited by cheaper oil
  •  Inflation expected to accelerate this year, but will remain moderate

Consumer prices decreased by 0.3% in monthly terms in December last year. Seasonal decrease in the prices of clothing and footwear (-3.2%) and an unusual drop in the prices of vegetables (-11.9%) were mainly behind the monthly deflation. With the effect from the sharp decrease in the oil prices as of end 2014 easing, the price growth has slightly accelerated in annual terms - to 0.3% in December. Overall average annual inflation stood at 0.2% in 2015.





The largest contributor to the average annual inflation last year was a 28% increase in the prices of electricity, following the liberalisation of electricity market for households and abandoning part of the previously subsidized tariffs in the beginning of 2015. Excluding the impact from electricity, there would be a moderate deflation in Latvia (-0.7%), similarly as in Lithuania (-0.9%) and Estonia (-0.5%). Housing tariffs overall increased more moderately than electricity, by 3.5%. The increase in the housing tariffs was held back by cheaper oil, which fed into gas (-5.2%) and heating (-8.2%) prices. Prices of fuel were by on average 14.4% cheaper than a year ago. Food prices decreased by 1.3% overall, yet with rather stark differences between products. Milk and milk products, for instance, were by 9.2% cheaper than a year ago (affected by oversupply and thus lower raw milk prices in Europe, partly due to abolition of the EU milk quotas and partly due to Russian embargo). Prices of coffee and tea, in turn, were by 7.2% more expensive - at least partly affected by on average 20% cheaper euro against dollar, as these goods are imported mostly in dollar currency. Prices of goods overall decreased by 0.7%. Prices of services, in turn, were by 2.6% higher, supported by strong wage growth.







Outlook
The growth-limiting impact from global commodity prices will start to gradually ease going forward, and domestic factors - for instance, strong wage growth and excise tax hikes for fuel products and alcohol will continue to support consumer prices in Latvia. The drop in oil prices, though, was larger than initially expected, and oil prices are likely to remain low for a longer period of time – thus the consumer price growth in Latvia this year will be lower than the 1.5% estimated before. The growth  likely will be closer to 1%.



For more information please contact Mr. Andrejs Semjonovs, +371 67445844, andrejs.semjonovs@swedbank.lv
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