Growth and not drop in Latvian prices was first of all, caused by power tariffs that have become more expensive in the course of market liberalization. The liberalized electric energy in 2015 has jumped in price even by 28%. If the situation remained at the level of 2014, i.e. power bills were controlled (and subsidized) by the State, inflation in Latvia would be (-0.7%). It means that the price situation in the previous year would develop similarly to Lithuania (-0.9%) and Estonia (-0.5%).
Fairness requires to note that the summary bills for public utilities in Latvia grew much slower than power prices: by 3.5%. Growth in utility payments was slowed down by oil cheapening, which in case of Latvia was manifested as the reduction in tariffs on gas (-5.2%) and heating (-8.2%).
Collapse of oil prices has directly affected the petrol and diesel fuel sold at Latvian fuel filling station. Within the last year, the prices have reduced here by average 14.4%.
Food products, in turn, have become by 1.3% cheaper, but the price behavior differed sharply among the groups of products. Thus, prices of milk and milk products were by 9.2% lower compared with the previous year (partly affected by overproduction and, accordingly, reduced purchase prices in Europe, partly due to cancellation of quotas in EU and partly in the result of Russia’s embargo). Coffee and tea, in contrast, have grown in price by 7.2%, which could take place under a certain effect of last year’s reduction of EUR/USD exchange rate (by 20% on the average), since these goods were mainly paid in USD.
By the end of the year, the goods on the average have become by 0.7% cheaper than at the year’s beginning while the services have grown in price by 2.6%, which was contributed by a steady increase in wages and salaries.
In the new year, a counter-inflation influence of world raw material prices will gradually weaken while the growth in consumer prices will be still maintained by external factors, such as sharply rising labour compensation (inducing the growth in prices of services) and increasing excise tax on alcohol and oil products. However, oil prices have dropped lower than initially anticipated and will most probably remain at a very low level for a long time.
At present time, inflation is held at its lowest mark. Low prices of raw materials and low level of world economic activity will act as inflation constraints. It should be noted here that inflation in this year will be revived by tax changes.
Anyhow, in the nearest future inflation will not be a threat to further growth in purchasing power. Growth in consumer prices in Latvia will hardly reach the expected 1.5% during this year and more probably will approach 1%.
