RIGA - In what is hoped to be the start of the long-awaited easing of inflationary pressures, the latest consumer price inflation report for June registered an annual rate of 17.7 percent for Latvia, signaling that the 17.9 percent increase for May might have been the peak.
"The main boost to inflation in June was fuel, which added 6 percent in one month, making up half the total monthly figure. In the food group, the seasonal rise in fruit prices had the strongest influence. The seasonal factor played in the opposite direction as well, and discounts led to price declines on clothes and footwear," said Zigurds Vaikulis, head of the market-analysis department at Parex Asset Management.
Inflation at year's end is still expected to be over 10 percent, and probably closer to 12 percent, while average inflation in 2008 could be stuck at around 16 percent, he says. Hansabanka economist Ivonna Slapina agrees, adding, "The growth in fuel prices mirrors the growth in oil prices."
If food and oil prices keep climbing, inflation in Latvia may not drop as fast in the second half of 2008 as was expected at the beginning of the year, analysts at Latvia's SEB Banka warn in their latest macroeconomic outlook. "Price increases for fuel and food are strongly driven by global processes that have gained such momentum that it is virtually impossible to predict the end of these hikes, and further price records are still ahead of us. Such a steep rise in energy and food prices has prompted consumers and entrepreneurs to change their habits," the report said.
The analysts note that the present energy prices indicate a coming rise in utility prices at the end of the fall. These external factors may make it impossible to curb inflation. "In the second half of the year inflation might subside at the expense of domestic factors, and be determined mostly by decreasing purchasing power and activity, which will depend on the pricing policy of businesses of all sectors," the outlook says, forecasting average annual inflation in Latvia at 15.5 percent to 16 percent in 2008.
"The existing prices for catering, hotel, culture, entertainment and sports services, as well as education, are still raising questions about price increases. Such hikes cannot be sustainable, as more and more residents find these services less affordable, and often the price does not match the quality," the analysts conclude.