Average inflation in Latvia this year will be higher than last - bank analysts

RIGA - This year's average annual inflation in Latvia will be higher than last year's 1.3 percent, bank analysts told LETA, commenting on the data on consumer price changes last year published on Friday.

Swedbank economist Oskars Niks Malnieks told LETA that annual inflation in Latvia would slow down slightly in the coming months, spending the rest of the year in the 2-3 percent range.

He also noted that last year, average annual inflation in all categories except transport-related goods and services declined compared to 2023. At the same time, while wages continued to rise very rapidly, inflation in services proved to be persistent. "The good news from households' point of view, however, is that their purchasing power regained the ground lost earlier last year," Malnieks added.

He points out that last year was not without turmoil about and around food prices. For Latvia, as a small, open economy, global processes form part of the food inflation story, e.g. avian flu pushed up the price of eggs and poultry meat across Europe, adverse weather conditions in coffee-exporting countries pushed up coffee prices. The weather also had an impact on what industry observers have called 'non-harvest' at home.

"Consumers could see this impact in their wallets at the end of the summer, when vegetable prices did not contract as much as usual in other years and fruit prices even rose significantly in September. However, the sharp rise in wages in both the retail and food production sectors may have played a major role in the food price story," Malnieks says.

He also notes that the Ministry of Economy has created a five-point plan to tackle unfair food pricing. "There is still a lot of uncertainty as to how much of what has been promised will materialize and what the effect of the plan will be. Either way, price regulation distorts the market in the long run and makes Latvia less attractive to new market players. So it works in the opposite direction to the desired one - to promote sharper and healthier competition in food trade," Malnieks said.

He also notes that a skilled entrepreneur is often able to navigate the twists and turns of legislation, so more regulation by the state may very well not achieve the desired result in substance. "A better approach is to give the necessary resources and a sufficiently capable whip to the Competition Council, which can then be used in case of competition infringements," says the Swedbank economist.

He also predicts that inflation in Latvia this year will be higher than last year.

Malnieks also notes that disruptions to EstLink2, as well as desynchronization from the BRELL network, could mean higher electricity prices. This month, as in January last year, the amount of state support for households to pay for capacity maintenance is decreasing and households' electricity bills will increase accordingly. Another factor linked to energy costs is gas prices: since January 1, no Russian gas has been transiting through Ukraine and European gas storage facilities are emptier than in 2023 and 2024, which has pushed up natural gas prices on European exchanges. "A more expensive gas price in Europe could mean more expensive heating and electricity here too," he adds.

He mentions that the inauguration of Donald Trump as US President is expected soon. Accordingly, we will soon see whether and to what extent Trump's pre-election promises and threats, for example on tariffs, will come true.

Malnieks explains that US trade policy has a direct impact on the European economy, as the US is Europe's main export market. As a result, the economic recovery in Europe may not be as rapid as previously expected.

According to Malnieks, inflation in Latvia this year could average around 2.6 percent or slightly higher.

Dainis Gaspuitis, a macroeconomic expert at SEB Banka, told LETA that lower energy prices are still keeping annual inflation from reaching even higher levels, while prices in other segments continue to rise at different rates. Food prices are particularly sensitive, accounting for almost half of December inflation.

He also notes that for most of 2024 inflation in Latvia hovered around the 1 percent mark and gradually, towards the end of the year, as the impact of falling energy prices faded, price increases in other groups began to show up more markedly.

"In January and in the following months, inflation will be amplified by tax increases. Inflation will therefore stay around the 3 percent mark at the start of the year and then moderate somewhat. However, the rise this year will be faster than last year and will stay slightly above 2 percent in most months," Gaspuitis said.

He also notes that although wage growth will still convincingly outpace inflation and ensure a recovery in purchasing power, it will be very uneven across different groups. This means that the negative impact of inflation will continue to be felt in many places. Given weak productivity growth, wage growth will be one of the most important factors for further price increases.

According to Gaspuitis, the most important risk to inflation resilience is the risk of energy price volatility. Warm weather conditions have currently limited the scope for these risks to manifest themselves.

He predicted that annual average inflation in Latvia would be 2 percent in 2025.

"Food, utilities and healthcare service prices are likely to continue rising this year. The state will not be able to control the reasons for all price increases and start regulating them. It is not necessary. The primary focus will be on addressing competition and the efficient functioning of the market. It seems that it will be necessary to monitor more closely price developments in services that are important for residents and where monopoly power prevails," notes Gaspuitis.

Luminor Bank economist Peteris Strautins told LETA that the worst news in the December data was that after a five-month lull, monthly inflation in services prices was high again, with them costing 0.9 percent more than in November, while a typical figure for the season would be around 0.4 percent. "With wage growth in the private sector having slowed sharply, it is reasonable to expect that this will prove to be an exception," he adds.

Strautins also notes that it is unpleasant that food in Latvia cost 1.1 percent more in December than in November, and the increase was double the typical increase for this month.

"However, we cannot say that something very dramatic happened in December. The following comparison may help to grasp the big picture: prices in December were only 0.3 percent higher than in May and 0.4 percent higher than in May 2023," the Luminor Bank economist said.

Strautins also points out that the perception of inflation is quite exacerbated, and this fact cannot be ignored. One of the reasons for the still stark discontent is that price changes over the year are not the only possible measure of changes in the cost of living. The overall price level last year was on average 29.4 percent higher than in 2021. Price rises for certain products have been very marked in the more recent past, for example butter cost 34.9 percent more in December than a year ago and chocolate 20.4 percent more. This is due to the high prices of butter and cocoa on the exchanges.

Another very important factor, he said, is that inflation is higher than average for goods and services that we pay for frequently. "The perception of the world is determined by the events we receive frequent reminders about," said Strautins, adding that we buy food and non-alcoholic beverages on a daily basis and they were 5.5 percent more expensive in December than a year ago, we also receive regular reminders about changes in tariffs for communication services (+6.2 percent), we visit the hairdresser (+5.8 percent), pay for courses (+6.1 percent), buy newspapers and magazines (+18.2 percent).

Strautins also notes that this year, 2025, the average annual inflation in Latvia will be significantly higher - about 2.5 percent compared to 1.3 percent last year.

"The calming of energy prices after the pandemic and the shock of the outbreak of war will have been broadly reflected in consumer price data, but costs for businesses will rise overall, driven mainly by wage increases - more moderate than in 2023-2024, but still significant," says Strautins.

It is not only prices that are rising, he stresses. Wages last year were about 32 percent higher than in 2021, but they have risen 2.2 times in ten years, while prices have risen 46 percent in that time.

As reported, Latvia's average annual inflation was 1.3 percent last year.

At the same time, consumer prices in Latvia rose by 0.2 percent in December 2024 compared to November, and by 3.3 percent over the year - in December 2024 compared to December 2023.