In July 2012, Latvia saw consumer price inflation of 1.7% year-over-year, below the 2% target for the second straight month. Fuel prices declined in July according to government statistics, though they rose in the second half of the month. It is difficult to estimate the impact of a recent VAT rate cut due to typical seasonal food and clothing price declines. Inflation expectations among consumers and retailers have diminished in recent months. Annual inflation is projected to remain below 2% in the coming months, with a possible rise in the fourth quarter, though the forecast may be revised down given recent price trends.

1. Flash comment: Latvia
Economic commentary by Economic Research Department August 8, 2012
Annual consumer price growth at 1.7% in July
Consumer price growth, % In July 2012, Latvian consumer prices declined by 0.5% compared to
15 3 previous month. It is a bit larger decline than we expected, because fuel
prices fell in July according to Central Statistical Bureau of Latvia (CSBL).
10 2
Fuel prices have been growing in the second half of the month, but CSBL
collects price observations in the middle of the month. As a result, we will
5 1
see already occurred fuel price rise in August statistics.
0 0
It is hard to estimate the effect of VAT base rate cut (from 22% to 21%) on
consumer prices due to traditional seasonal deflation in July (e.g., food,
-5 -1
clothing and footwear prices went down as usual). It seems that seasonal
-10 -2 effects played a larger role in July’s deflation than VAT cut. Still, there was
2009 2010 2011 2012 an automatic decline in electricity tariffs and fuel, while gas tariff hike was
CPI, mom (rs) Goods, yoy smaller due to tax changes.
Services, yoy Source: CSBL
CPI annual growth continued to decelerate and was 1.7% in July, being
Contribution to CPI annual growth, pp
below 2% for the second consecutive month. Prices of household
12 equipment, clothing and footwear, communications, and education were
10 still lower than a year ago. Food prices were by 16% higher than a year
8
ago, transport – by 0.9%, housing – by 5.7% (due to increased gas and
6
heating tariffs).
4
2 Inflation expectations of consumers and retailers have continued to
0 diminish in recent months, most likely owing to favourable global
-2 developments and also announced VAT cut. Domestic price pressures
-4
remain weak, and core inflation (excluding energy and unprocessed food)
-6
remains below headline inflation rate
2009 2010 2011 2012
Food Transport
Housing
Total, yoy growth
Other
Source: CSBL Outlook
Consumer inflation expectations and Annual CPI growth is expected to remain below 2% in the coming months,
CPI growth, points although it is likely to somewhat exceed 2% in the last quarter due to base
60 15
effects. We do not anticipate new gas and heating tariff hikes in the
second half of the year (provided global oil prices stay by and large stable)
40 10
So far our forecast for average consumer price growth this year stays at
20 5 2.8%. However, it does not take into consideration price developments in
0 0
the recent months and thus is likely to be revised downwards.
-20 -5
-40 -10
Lija Strašuna
2009 2010 2011 2012 Senior Economist
Consumer price expectations over next 12M + 371 6 744 5875
Price expectations over next 3M in retail
CPI annual growth, % (rs) lija.strasuna@swedbank.lv
Source: DG ECFIN, CSBL
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