Flash Comment: Latvia - December 8, 2011: Latvian CPI inflation continues to ease

1. Flash comment: Latvia
Economic commentary by Economic Research Department December 8, 2011
Latvian CPI inflation continues to ease
Consumer price growth, % Latvian consumer prices stayed constant in November 2011. Food
15 3 prices also did not rise, as seasonal increase in prices of fruits and
vegetables was outweighed by fall in dairy, eggs, and bread.
10 2
In annual terms CPI growth continued to decelerate (for the third
5 1 consecutive month). Prices in November were by 4.2% higher than
a year ago (4.7% in August).
0 0
The upward pressure from global commodity prices on Latvian CPI
-5 -1 inflation continues to diminish; this can be particularly seen in food
prices. Annual growth of food prices decelerated to 5.6% in
-10 -2
November from 11.5% in May 2011. Contribution of food prices to
Jan.09 Jan.10 Jan.11
CPI, mom (rs) Goods, yoy total CPI inflation also continued to decline (to 33% from about 60%
Services, yoy Source: CSBL in beginning of the year).
Contribution to CPI annual growth, pp At the same time fuel and housing services’ price growth remain
12 quite robust. In November fuel prices grew by 18.5% yoy, while
10 electricity, gas and heating tariffs by 11.5% yoy. Housing services’
8 tariffs are mostly affected by the hike in electricity tariffs this spring,
6 but electricity prices are expected to remain stable in the upcoming
4 year. With global oil price pressures easing, price growth of
2 transport and housing is expected to decelerate next year.
0
-2 Outlook
-4
-6 Annual inflation is expected to remain close to 4% in December.
Jan.09 Jan.10 Jan.11 Therefore, the average price growth for this year most likely
Food Transport
Housing Other will be 4.4%, which is marginally lower than our earlier forecast of
Total, yoy growth Source: CSBL
4.5%.
Consumer inflation expectations and
CPI growth, points So far the forecast for average consumer price inflation in
80 20 2012 remains at 2.4%. However, if economic development slows
more extensively than currently anticipated (e.g., if eurozone enters
60 15
new recession), price growth is likely to be smaller. Although this
40
10 might ease financial situation for households, it is likely to put
20 government budget under pressure as tax revenues would be
5
0 lower. In such a case larger consolidation for 2012 would be
0
-20 necessary to achieve currently planned 2.5% of GDP deficit target.
-40 -5
-60 -10
2007 2008 2009 2010 2011 Lija Strašuna
Inflation expectations over next 12M Senior Economist
CPI annual growth, %
Source: DG ECFIN, CSBL
+ 371 6 744 5875
lija.strasuna@swedbank.lv
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