Economist: Rising inflation indicates an improvement in the economic situation

As in previous months, fluctuations in fuel and food prices had the largest impact on consumer price changes in July. With declining oil production and rising economic activity, global oil prices have risen to around $ 40-45 a barrel from around $ 20 a barrel in the second half of April. This price increase can also be seen in Latvian petrol stations, where prices increased by 3.5% in July. Also, food prices rose by 0.7% in July, which is also largely due to external factors. World food prices have risen by 3.5% since May, according to the United Nations. Recovery from the initial shock of COVID-19 can also be seen in other sectors. For example, after falling in the previous 3 months, clothing and footwear prices rose by 2.1% in July compared to last year. In fact, in price statistics, the impact of the COVID-19 shock is now clearly visible only in hotel prices, which were 10.9% lower in July than a year earlier and are not expected to reach the previous level for even longer.

The decline in the Latvian economy this year will definitely be smaller than expected in the spring months and we also see this in consumer prices. There will definitely be no deflation in Latvia this year and it is quite probable that the price increase will exceed 0.5% this year, while next year inflation in Latvia could again exceed 2%. However, as with economic forecasts, the dynamics of consumer prices will largely depend on the further spread of the COVID-19 virus, not only in our country, but also in the world as a whole.

It is now much more difficult to forecast longer-term inflation trends. The amount of fiscal and monetary stimulus in the world is very high this year, and the amount of money is growing rapidly. This may raise concerns about the risk of higher inflation in the coming years, but I think that the risk remains low. Unemployment has risen both in Latvia and in other countries, which will reduce the pressure on wages, which in turn will slow down the rise in consumer prices in the service sectors. Commodity prices should also not rise sharply, as the global production system is operating quite efficiently after minor shocks in the spring. However, if the substantial economic stimulus continues for longer than is necessary for economic recovery, then we cannot rule out higher inflation in the coming years than we have seen in recent years.

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