News FM: The fall in prices continues to be driven...

FM: The fall in prices continues to be driven by falling commodity prices

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Since the beginning of the year, the overall inflation picture in Latvia has changed significantly. If in January and February the annual inflation exceeded 2%, then in May and June of this year, for the first time since mid-2016, deflation was fixed. The sharp fall in consumer prices in just a few months is due to the Covid-19 pandemic and its aftermath, mainly through falling oil prices on world markets, as well as a sharp drop in demand for tourism-related services (such as air transport and accommodation services).

Therefore, in general, commodity prices in June this year were 1.6% lower than a year ago. In contrast, prices for services, in contrast to the fall in prices for goods, continued to rise in June this year and were 1.3% higher. However, the impact of the pandemic has also been felt in the services sector, as the rise in service prices has more than halved since the beginning of the year.

Similarly to May, when annual deflation in Latvia was 0.6%, in June the largest contribution to the decline in consumer prices was determined by a 16.0% decrease in fuel prices compared to June of the previous year. However, it is important to note that the lowest level of fuel prices was reached in May, when fuel was 24.3% cheaper than a year ago. This is also indicated by the dynamics of oil prices in recent months. If the average price of Brent crude oil in May was USD 27.3 per barrel, which was more than two and a half times lower than in May last year, then already in June the price of Brent crude oil increased to USD 40.8 per barrel. However, it was still a third lower than in June last year. The rise in oil prices was driven by the OPEC + agreement in June to extend the reduction in oil production, as well as the gradual increase in energy consumption in May and June, together with the easing of restrictions on the spread of the coronovirus. Thus, the price of oil on world markets at the end of June was more than twice as high as in April, when it reached its lowest level since 2003. The price of oil is expected to continue to fluctuate around USD 40-45 per barrel in the coming months, which will still be lower than last year’s average. However, due to the base effect, the decline will be smaller than in May and June.

Administratively regulated prices for natural gas and heat also depend on oil prices. In June, the price of gas was 18.5% cheaper than a year ago. Heat energy, on the other hand, was 0.1% more expensive compared to June last year. Several heat companies are announcing reductions in the heat tariff due to the fall in oil prices. Thus, JSC “Rīgas Siltums” has reduced heat energy tariffs twice since the beginning of the year, however, due to base effects, the fall in heat energy prices has not been observed in the inflation data yet. However, starting from August, when the base effects disappear, the price of heat energy will be lower compared to the corresponding month of the previous year.

Prices have also fallen for electricity, which was 2.7% cheaper in June than last year. The fall in prices was due to lower electricity prices in all trading areas of the Nord Pool exchange due to lower electricity consumption due to warm weather conditions, as well as lower economic activity during the emergency.

It is important to note that cheaper fuel and falling prices for housing-related energy goods and services, which account for a large share of the consumption of the less affluent, are to be welcomed in the current pandemic situation, as they reduce consumers’ fixed costs.

The closure of borders and a significant drop in foreign tourists reduced housing rents by 5.6% and accommodation prices by 13.2%. The most recent data show that the number of foreign tourists in Latvia in April and May decreased by 98.4% and 96.5%, respectively, compared to the corresponding month last year, thus reducing the demand for rental housing and hotels. An equally significant drop in foreign tourists is likely to continue in June and July, while in the second half of the year the drop could slow in the absence of the second wave of Covid-19. With regard to changes in the prices of these services, prices will continue to fall on an annual basis until the end of the year.

Given the sharp fall in fuel prices, as well as the effects of Covid-19, which will be reflected in a decline in foreign tourist flows and a temporary decline in household income, which will reduce demand and thus prices for certain services, deflation is expected to persist until at least October this year. -Novembrim. However, given the rise in prices in the first quarter of the year, overall inflation will be positive in 2020, albeit significantly lower than in previous years.

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