Deflation to continue in Latvia in coming months - bank analysts

  • 2020-07-08
  • LETA/TBT Staff

RIGA - Deflation in Latvia will continue in the coming months, bank analysts told LETA commenting on consumer price changes this past June.

SEB Banka's macroeconomic expert Dainis Gaspuitis told LETA that the price level in the coming months would be most affected by the recovery of oil prices and next year by the global economic growth.

As the restrictions are lifted, certain sectors, such as catering, tourism-related products and services, will be able to recover. However, this will not change the overall situation, which will be impacted by weaker demand, said Gaspuitis.

Large part of consumers will remain cautious about spending, while food prices will continue to rise at a moderate pace, added Gaspuitis.

The situation on the labor market also means that, in the short term, wage pressure on prices will ease slightly, but that could change rather quickly already next year.

As for the frequent concerns about the impact of money printing on inflation, the effect of stimulus policies on inflation is very limited in the current economic environment, Gaspuitis said.

"'Inflation in Latvia will continue in the coming months," said Gaspuitis, adding that the average annual inflation in Latvia this year could be around 0.3 percent, while next year inflation could rise to 2 percent.

Swedbank economist Laimdota Komare told LETA that, year on year, consumer prices were affected the most by the falling fuel prices, which have decreased 16 percent, even though fuel prices rose steeply last month, by 9.2 percent. In July, the price of Brent oil was higher than USD 40 per barrel, which is twice as high as compared to the lowest price this year, but still well below last year's level.

Utility payments also have a downward impact on the overall price level, said Komare. On June 1, heating company Rigas Siltums reduced heating tariffs by 5 percent, she reminded.

The June statistics do not yet fully reflect all the price changes caused by the Covid-19 crisis. For instance, data on airline passenger numbers, film theater and theaters, recreational facilities' services are still not available. "However, we can already see that, compared to June last year, the prices of hotel and guesthouse services have fallen by almost 22 percent," said Komare.

Given that Covid-19 restrictions introduced in March were eased quite quickly, price changes are starting to stabilize. Komare believes that inflation will return to Latvia at the end of the year.

Luminor economist Peteris Strautins, in turn, told LETA that, due to seasonal factors, the consumer price level would decrease again in July and August, and the year-on-year deflation rate would be similar to the current level for several months.

Economic recovery has been very fast as compared to March and April, for instance, retail sales in Europe recorded the steepest-ever increase in May. However, further recovery will be weaker. The growth of unemployment has been moderate, for instance, unemployment in Latvia this past May reached the level of 2016, although it could have been much worse. Nevertheless, reducing unemployment will be difficult in the near future, said Strautins.

Strautins also mentioned the effect of low commodity and oil prices, and the risk of a second wave of the coronavirus.

As reported, in June 2020 Latvian consumer prices rose 0.2 percent against May 2020 but dropped 0.7 percent from June 2019, according to the data released today by the Central Statistical Bureau.