- In June, Latvia's annual consumer price inflation slowed to 1.9%, down from 2.2% in May, as food prices rose 1.7% while transport costs increased 1.6% and housing prices grew 5.6%. - Heating tariffs are expected to rise in July and September-October due to higher gas prices earlier in the year, which could undermine household spending, though fuel prices have fallen since April. - Assuming stable global oil prices for the rest of 2012, heating tariffs should decrease toward the end of the year, though weaker euro or higher oil could delay reductions; average inflation is forecast at 2.8% for the year.

1. Flash comment: Latvia
Economic commentary by Economic Research Department July 9, 2012
Annual consumer price growth at 1.9% in June
Consumer price growth, % In June 2012, Latvian consumer prices declined by 0.1% compared to
15 3 previous month. A fall in prices of fuel, household equipment, and
seasonal sales of clothing and footwear compensated for a seasonal price
10 2
rise of food items.
5 1 CPI annual growth continued to decelerate and was 1.9% in June (2.2% in
May). Prices of household equipment, footwear, communications, and
0 0
education were still lower than a year ago. Food prices were by 1.7%
higher than a year ago, transport – by 1.6%, housing – by 5.6%.
-5 -1
Inflation expectations of consumers and retailers have diminished in
-10 -2
recent months. Domestic price pressures remain weak, and main drivers
2009 2010 2011 2012
CPI, mom (rs) Goods, yoy for price changes remain those from abroad. The contribution of food and
Services, yoy Source: CSBL transport price changes to headline annual CPI growth has declined
substantially in the recent months owing to favourable developments
Contribution to CPI annual growth, pp
globally. The contribution of housing tariffs remains high though,
12 explaining more than 40% of annual inflation rate.
10
8 Outlook
6
4 In June heating tariffs of Rīgas Siltums (central heating in Riga) rose by
2 1.5% due to inclusion of last year’s gas excise tax hike. Gas and heating
0 tariffs are expected to increase in July as well (3-5% for natural gas taking
-2
into account smaller VAT rate as of July, about 6% for Rīgas Siltums) due
-4
to oil price growth earlier this year. Households will feel the heating tariffs’
-6
rise only in autumn though, when the heating season starts. We anticipate
2009 2010 2011 2012
Food Transport about 1/5 higher heating tariffs in September-October comparing to a year
Housing Other
Total, yoy growth Source: CSBL ago (according to latest gas price forecasts by Latvijas Gāze), which might
undermine other household spending at the end of this year.
Consumer inflation expectations and
CPI growth, points At the same time, considering the fall in oil and thus fuel oil prices (to
60 15
which gas prices are bound) in April-June and assuming they remain by
and large stable during the rest of the year, heating tariffs should diminish
40 10 somewhat towards the end of the year. Of course, possibly weaker
20 5
EUR/USD exchange rate and an increase in global oil prices would delay
a fall in domestic tariffs. However, we do not anticipate more tariff rises in
0 0 the second half of the year.
-20 -5 So far our forecast for average consumer price growth this year stays at
-40 -10
2.8%. However, it does not take into consideration the VAT cut as of July
2009 2010 2011 2012 1st, and thus is likely to be revised downwards. 12 month average CPI
Consumer price expectations over next 12M annual inflation continued to decelerate and was 3.6% in June (3.9% in
Price expectations over next 3M in retail
CPI annual growth, % (rs) May). It will continue to slow down in the coming months. We thus
Source: DG ECFIN, CSBL
consider fulfilling the Maastricht inflation criterion in early 2013 realistic.
Lija Strašuna
Senior Economist
+ 371 6 744 5875
lija.strasuna@swedbank.lv
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