Latvian inflation affected by rise in domestic food prices and slowing global economic growth - Finance Ministry

RIGA - Latvian inflation continues to be affected by rising domestic food prices, which are pushing up the inflation rate, and by the slowdown of global economic growth, which is keeping prices down as demand weakens, LETA was told at the Finance Ministry.

Based on the data for the first five months of this year, the ministry projects the Latvia's annual inflation rate exceed 3 percent this year.

The Finance Ministry notes that inflationary pressures are already easing globally and that price inflation in the euro area fell back below the 2 percent mark in May, which is the European Central Bank's target for inflation. However, the situation in Latvia is different.

The Finance Ministry is also in the process of updating its forecasts for macroeconomic indicators, including inflation, which will be published in mid-June.

The ministry notes that consumer price inflation in Latvia slowed slightly in May, with a 0.1 percent month-on-month decline and a 3.6 percent year-on-year increase, according to the latest data from the Central Statistical Bureau (CSB).

The lower inflation rate in May was driven by a decline in fuel prices amid falling oil prices on the world market, while food and non-alcoholic beverages prices continued to rise, climbing by 7.5 percent over the year. As labor costs increase, rising services prices also continue to push the inflation rate up. In this group, the most significant impact has been a 3.7 percent year-on-year increase in health care prices, a 7.6 percent increase in prices of recreational and cultural services, a 10.3 percent increase in prices of educational services and a 4.8 percent increase in prices of restaurants and hotels.

Food prices remain the most important driver of inflation, having risen sharply since the middle of last year and accounting for more than half of overall inflation in May. Food price inflation is currently being pushed up by rising commodity prices on world markets, as well as by rising labor costs amid continued wage growth.

However, the ministry points out that these factors do not fully explain the sharp increase in prices in Latvia, especially in the context of falling energy and fuel costs. The sharpest food price hikes in Europe have been recorded in the Baltic countries, as well as in Eastern European countries, where the share of food in the consumption basket is highest and has a stronger negative impact on overall inflation and people's purchasing power.