Fast economic rebound has dispelled worries about prolonged deflation - bank analysts

  • 2020-08-10
  • LETA/TBT Staff

RIGA - A fast rebound of the Latvian economy has dispelled concerns about a prolonged deflation, although seasonality might cause consumer prices to drop again in August, the surveyed bank analysts told LETA. 

Dainis Gaspuitis, a macroeconmics expert at SEB Banka, noted that the monthly price hikes in July were slightly unusual for the price cycle but that the economy convincingly started to break loose from the Covid-19 grip, which revived consumption and accordingly also the prices. 

"In August, prices will probably reflect traditional seasonality, sending prices back to the deflation area," Gaspuitis said, adding that the fast rebound of the economy has dispelled concerns about a prolonged period of deflation. 

Luminor economist Peteris Strautins told LETA that the toughest economic impact of the pandemic is already over and that consumer prices have risen again in annual terms. 

Strautins also projected a brief return of deflation in August, indicating that weather conditions have been favorable for the agricultural sector and that a stronger euro currently might also keep prices down. 

The Luminor economist said that Latvia is overcoming the hardest phase of the coronavirus, as production and trade are picking up and unemployment is dropping, but with the approach of the fall concerns are growing as it is evident that the virus is still around and will not let life get back to normal this year. 

Strautins projected Latvia's average annual inflation at 0.4 percent in 2020. 

Martins Abolins, an economist at Citadele Bank, noted that the July inflation was yet another signal of a relatively swift recovery of the Latvian and global economy from the Covid-19 shock.

Abolins said that by now, the Covid-19 impact could only be seen in hotel prices, which in July remained 10.9 percent below the prices recorded a year ago.

"Latvia's economic downturn this year will definitely be smaller than was expected in the spring, and we are seeing this also in consumer prices. There will definitely be no deflation in Latvia this year, and it is quite likely that price increases will exceed 0.5 percent this year. Next year, inflation in Latvia might exceed 2 percent," Abolins said. 

As reported, the average level of consumer prices this past July as compared to June increased 0.2 percent, while compared to July 2019, the average level of consumer prices has increased by 0.5 percent, which means that after two months of deflation, inflation has returned to Latvia, according to the Central Statistical Bureau's data released on Monday.

Compared to June 2020, in July 2020 the average level of service prices went up by 0.5 percent and of goods by 0.1 percent. Year-on-year, prices of services have increased 1.6 percent, while prices of goods have not changed.