Latvia saw a 0.4% month-over-month increase in consumer prices in September 2011, bringing annual inflation to 4.6%. Food prices increased 0.4% due largely to higher vegetable costs, while fuel prices fell slightly. Overall, inflation has been driven by transportation, food, and housing costs. Swedbank forecasts inflation will slow to around 2.4% in 2012 if taxes remain stable and global commodity prices decline.

1. Flash comment: Latvia
Economic commentary by Economic Research Department October 10, 2011
Annual inflation at 4.6% in September 2011
Consumer price growth, % Latvian consumer prices increased by 0.4% mom in
September 2011, which is marginally lower than we expected. As
20 4
anticipated, food prices increased (0.4% mom), especially for
15 3 vegetables (17.5%), mainly due to seasonal factors. Meanwhile,
10 2 fuel prices decreased a bit (-0.1% mom). A small rise in housing
prices (0.1%) was mostly due to increase in rental fees.
5 1
In annual terms CPI growth decelerated marginally to 4.6%
0 0
from 4.7% in August. As before, the strongest price growth is
-5 -1 observed in transport (8.5%), food (7.9%), and housing (7.7%). It
-10 -2 should be noted, however, that annual price growth of food
Jan.08 Jan.09 Jan.10 Jan.11 products continues to decrease, and the contribution of these first-
CPI, mom (rs) CPI, yoy necessity goods and service to total inflation is slowly diminishing.
Goods, yoy Services, yoy
Source: CSBL
Price falls in global markets for main commodity groups that are
crucial for Latvian consumers are still not very pronounced.
Contribution to CPI annual growth, pp However, the downward tendency is expected to continue. And
with global commodity prices falling, consumer price growth of first-
20
necessity goods and services in Latvia should diminish as well.
15
This would ease somewhat financial situation of poorer Latvian
households.
10
Among other groups annual deflation is now observed in education
5
(-2%) mostly due to decline in university fees for new students in
previous two years. Prices of health care are by 3.1%,
0 communications – by 1.8%, and recreation and culture – by 1.6%
lower than a year ago.
-5
Jan.08
Food
Jan.09 Jan.10 Jan.11
Transport
Outlook
Housing Other
Total, yoy growth Source: CSBL Swedbank forecasts 4.5% average consumer price inflation in
2011. It is then expected to come down to about 2.4% in 2012,
assuming that taxes are not raised and global commodity prices
decrease somewhat. Since April 2011 consumer inflation
expectations have notably decreased, which might make it more
difficult for businesses to raise prices. Consequently, price
developments increasingly depend on extent of local competition,
especial in retail trade. Promoting competition would help not only
reduce price pressures, but also encourage productivity growth and
competiveness gains.
Lija Strašuna
Senior Economist
+ 371 6 744 5875
lija.strasuna@swedbank.lv
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