Flash Comment: Latvia - January 9, 2012: Latvian CPI inflation will continue to diminish in 2012

1. Flash comment: Latvia
Economic commentary by Economic Research Department January 9, 2012
Latvian CPI inflation will continue to diminish in 2012
Consumer price growth, % Latvian consumer prices were constant in December 2011, in line
15 3 with our expectations.
10 2 In annual terms CPI growth continued to decelerate (for the fourth
consecutive month). Prices in December were by 4% higher than a
5 1 year ago (4.7% in August). During the year the most rapid price
growth was observed in housing services’ (7.8% due to global oil
0 0
price increase in early 2011 and raised electricity tariffs in spring),
alcohol and tobacco (6.9% due to excise tax increases), transport
-5 -1
(6.2% due to global oil price growth and excise tax hikes). Food
-10 -2 price inflation decelerated notably in the second half of 2011
Jan.09 Jan.10 Jan.11 following global commodity price developments, but still amounted
CPI, mom (rs) Goods, yoy to 4.7% in December.
Services, yoy Source: CSBL
Annual average inflation was 4.4% in 2011. With economic growth
Contribution to CPI annual growth, pp
slowing and commodity prices retreating, we expect consumer
12 price inflation to decelerate further in 2012.
10
8 Outlook
6
4 So far the forecast for average consumer price inflation in 2012
2 remains at 2.4%.
0
-2
In the first quarter of the year gas and heating tariffs are anticipated
-4
to increase; however, they are forecast to be by and large stable
-6
Jan.09 Jan.10 Jan.11
during the rest of the year (unless global oil prices increase notably
Food Transport due to, e.g., another geopolitical conflict). If oil prices stay close to
Housing Other
Total, yoy growth current levels, there are no reasons for notable fuel price growth in
Latvia as well (except for possible weakening of EUR/USD
Consumer inflation expectations and exchange rate). Prices of housing services are thus expected to
CPI growth, points
rise substantially slower than in 2011, so are food prices (if there
80 60 are no nature catastrophes or bad harvests in the world key food
60 50
producing countries).
40
40
30
20 20 Fulfilling Maastricht inflation criterion is realistic for Latvia; 12 month
0 10 average inflation is expected to marginally exceed 2% in early
0 2013. However, healthy local competition is crucial, as with
-20
-10
-40 retreating commodity prices and slowing economic growth, inflation
-20
-60 -30
is expected to decelerate also in other European countries.
2007 2008 2009 2010 2011
Consumer price expectations over next 12M
CPI annual growth, %
Price expectations over next 12M in retail Lija Strašuna
Source: DG ECFIN, CSBL
Senior Economist
+ 371 6 744 5875
lija.strasuna@swedbank.lv
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