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Latvian CPI up by 0.2% mom (-3.1% yoy) in January 2010 Monthly inflation in January was mostly due to seasonal food price increases (1.8% mom), as well as fuel prices going up (3.4% mom, following the world tendencies). At the same time, deflation is still observed in prices of services (-0.6%) and non-food items (-0.4%). In January-February CPI is also usually influenced by annual sales. With economic situation changing in 2009 product weights in the consumer basket were also changed. It can be seen that consumers now spend relatively less on food and housing – both due to price/ tariff fall and decline in incomes (i.e. not able to afford as much as before). Expenditure shares of recreation and culture, household equipment, restaurants, clothing and footwear thus diminished due to tougher financial situation of households. Household expenditure share on transport also decreased due to lower fuel prices. Deflationary pressure remains and small monthly deflation will most likely resume in February. It can be diminished though by fuel, partly food, alcohol and tobacco price increases (due to tax changes and global price tendencies) – deflation in other main product groups will continue. Average deflation is expected to reach 3-4% in 2010. Due to seasonal factors and tax changes inflation might appear in some of the months; however, overall downward price trend will remain. Weak domestic demand will put downward pressure on prices of local goods and services. We expect that in the nearest year local price deflation will outweigh likely imported price increases (e.g. fuel). Deflation depth will also be influenced by the speed and extent to which productivity enhancement is achieved (as long as competitiveness improvement can be achieved through price and cost adjustment). The slower is productivity growth, the larger will be downward pressure on prices (and thus also wages and employment). |
