Latvia’s new excise taxes will spur inflation

How do Latvian economists assess the situation with prices? And what forecasts do they give?

Ieva Opmane, economist:

— Prices were expected to rise slightly in March as excise taxes on alcoholic beverages, tobacco products and sweetened soft drinks increased this month. Fuel prices also increased slightly during the month, while district heating tariffs continued to decline in a large proportion of localities.

Prices for services have been rising steadily in recent months, and the increased prices for intercity transport in April are still waiting to be reflected in statistics. However, prices are rising not only for transport, but also for various other types of services; for example, in March, prices for both water supply and sewerage services and some entertainment events increased.

Dainis Gašpuitis, economist:

— When comparing changes in the price level during the year, the only group where the price level fell was the cost of housing. This is largely due to falling energy prices, while many other housing-related services continue to rise in price. Given the favorable conditions on the gas market, heat tariffs should continue to decline.

Warmer weather has also reduced energy consumption, which should translate into stronger spending elsewhere. In other groups, especially in the services sector, price increases continue at a relatively rapid pace. It is affected by the increase in the cost of work, which is not always accumulated in costs and is passed on to end consumers.

Overall inflation will remain low in the first half of the year. In the second half of the year, as the impact of falling energy prices begins to fade, trends in service costs will become clearer, leading to higher inflation. Inflation is returning to normal, but under the influence of global events, including weather conditions, the situation can quickly change. The inflation forecast for this year is 1.4%.

Martins Abolins, economist:

— Consumer price inflation in Latvia is still very low, but prices overall continue to rise, and by the end of this year inflation in Latvia might once more exceed 2%.

The relatively large increase in prices in March was due to both seasonal factors, such as rising prices for clothing and footwear following the end of seasonal clothing sales, and an increase in excise tax rates from March 1, which increased the overall level of consumer prices in Latvia by 0.1% in March.

Inflation in Latvia as a whole is currently low and the economy is not yet growing, but the problems associated with inflation are unlikely to end. For example, service price inflation in Latvia remains high, and annual service inflation accelerated to 5.7% in March from 4.8% in February. This is still a very high level of inflation, and the overall price increase in March of 1.2% is the largest monthly price increase in Latvia since May last year.

In addition, lower energy prices are now less and less helpful in containing inflation, while in March fuel prices in Latvia were 2.8% higher than a year ago.

Peteris Strautins, economist:

— March is the time when prices usually increase the most compared to the previous month. On average over the previous 10 years, prices rose 1% this month, and this year the increase is even slightly higher.

One of the reasons for the March rise in prices is the end of the clothing and shoe sales season. Also this year, prices in this category of goods increased by 6.9% compared to February, so its impact on the overall price level was the strongest among the main consumer groups (12 in total) or 0.35 percentage points. Rising oil prices made transportation costs the second main driver of price growth, contributing 0.2 percentage points, while the impact of seasonality on food prices increased consumer spending by 0.19 percentage points.