The period of atypically low inflation (or, if you like, high deflation), which has been kept in Latvia four years in a row, is almost over. The current upsurge in prices coincided with hard braking of Latvian wages.
As a result, the post-crisis growth in the living standard, which began in 2010 and had been observed for the recent six years, has stopped. Which is bad. A good thing is that no fall in welfare of population of Latvia in the medium term is foreseen.
As to inflation, then in November 2016, if compared to October, the consumer prices in Latvia grew by 0.2%, but the annual growth, in general, made up 1.3%. On one hand, this is not much, but on another hand – against the background of the last year’s deflation this is, at least, unusual.
We can mention that services in Latvia become more expensive much faster than goods: the annual gain in prices for goods made up 0.6%, for services — 2.9%.
The increase in prices is based on increase in demand caused by the last year’s rise in Latvian wages, as well as by growing prices of oil derivatives (Latvia has no influence on these processes) and increase in excise taxes (here everything is in hands of the Latvian government).
In any event, the biggest influence on annual inflation was exerted by the increase in food and soft drink prices (by 2.6%), healthcare services (by 2.8%), recreation and culture (by 7.7%), tobacco products (by 5.2%).
We can mention that the increase of inflation coincided with the slower growth of income of the Latvian population. An average wage in the third quarter grew by 2.2% in annual terms, which is considerably slower than in the first half of this year, when wages grew by 4.6%, and last year, when they showed a growth of 7-9%.
In 2017 the average inflation of 2.2-2.4% is expected. Here possible spikes in oil and oil derivatives prices are not provided for yet, but in light of intense negotiations of the governments of OPEC countries and of other oil-producing countries seem quite possible.
Plus — liberalization of the gas market of Latvia is scheduled for next year, including forced fragmentation of monopoly of Latvijas Gāze. A shareholder of the company – Russian Gazprom can respond to the deprivation of indirect monopoly by raising prices for natural gas. Especially since the alternative in the form of a floating gas storage in Klaipeda will not be cheaper.
So, provided maintaining the current rise in income of population, the entire insignificant pay raise will go to absorb the rise in consumer prices. But in some segments such raise might be not enough. In particular, from the middle of August the crude milk procurement prices already grew by 50 percent, which would inevitably impact on the cost of dairy products.
We can only hope that earnings would speed up their growth and exceed Latvian inflation.