The rapid rise in prices in Latvia continues, and in April consumer prices in Latvia rose by 2.2% over the month, while annual inflation reached 13%, according to information published by the Central Statistical Bureau. The rise in world food, fuel and other energy prices still accounts for most of the rise in prices in Latvia, but the sharp rise in costs is pushing up prices in other sectors as well, and service price inflation in Latvia reached 6.4% in April. Unfortunately, world resource prices continue to rise and prices in Latvia will continue to rise in the coming months, while the highest inflation rate could be reached in late summer or early autumn. According to my forecasts, inflation in Latvia this year could be in the range of 12–14%.
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In April, as in previous months, energy prices grew the fastest in Latvia. Compared to the previous year, natural gas prices in Latvia increased by 71.2% in April, solid fuel – 45.9%, fuel – 45.7% and heat – 27.9%. In addition, food price inflation reached 17.7% in April. Russia’s invasion of Ukraine is one of the reasons why the rise in world resource prices has been so rapid in recent months, and the development of this war will certainly affect the further development of the world economy. At the same time, it is clear that there will be no quick fix to the energy crisis and that we will have to reckon with higher energy prices in the longer term.
Global oil prices currently fluctuate between $ 100 and $ 110, but the launch of strategic oil reserves, the continued resumption of Russian oil exports and China’s severe restrictions on Covid-19 are helping to keep that price level. Therefore, it is possible that oil prices may continue to rise during the summer. At the same time, oil prices currently only partially determine the rise in fuel prices in Latvia. During the Covid-19 pandemic, the world’s refining capacity has declined and Europe’s refining capacity is not producing enough diesel. Previously, this deficit was addressed by diesel imports from Russia. As a result, diesel prices in euro terms are significantly higher than in 2008, when world oil prices were higher than at present, and this is a significant risk to economic development. In addition, unfavorable weather conditions and high fertilizer prices create the potential for a further 10-30% rise in world food prices, while a significant increase in heat prices is expected in Latvia at the end of the year, as natural gas prices are currently five to six times higher than a year ago. It is clear here that it will not be possible to do without state support.
According to my forecasts, the inflation rate in Latvia will start to decrease in the second half of the year, but this means a slower rise in prices rather than a fall in prices, and inflation could exceed 5% next year as well. Uncertainty is very high and it is still difficult to predict price developments even a few months ahead. In my opinion, the sharp rise in prices is currently a major risk to economic growth, both directly, as it reduces the purchasing power of the population, and indirectly, forcing central banks to raise interest rates and slow down economic growth. At present, prices are rising faster than incomes, consumer sentiment is close to recession, and there is no sign of a global recession approaching. In my opinion, the risks of a recession in Latvia are high, so entrepreneurs have to reckon with a decrease in customers’ purchasing power, because if prices rise too fast, there will be a risk of losing sales.
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