As predicted, inflation continued to drop in the first months of the year, yet the continuous political tensions in the oil producing regions of the Middle East continue to be a topical risk factor for price rises.

Since January, it has been mostly two factors that have affected the consumer price dynamics: First, the rise in oil prices that continued to push up fuel prices in Latvia. Second, the effect of fuel price rises was balanced out by the end of seasonal sales on wearing apparel, footwear, household equipment: in these groups, price drops were still the case. Thus in February, the prices rose by a mere 0.1% overall, the annual inflation dropping to 3.4%.

This year, the average consumer price rises will be much slower than in 2011, and an important reason for this is the fact that there have been no indirect tax rises. (In 2011, by contrast, the VAT and excise tax rates were raised both at the beginning and middle of the year; at the beginning of 2011 a rapid rise in global food prices was observed which also helped to push up the inflation rate.) In the meantime, the global oil prices are high and that has a direct influence on the prices of fuel and regulated energy resource prices. If oil prices remain high over the course of the year, the rising energy costs will have and impact on the production of other goods and services. That can also act to increase the upward risks related to this year's inflation predictions. The so-called oil futures currently indicate a small falling trend and the Bank of Latvia maintains its forecast of 2.4% for the average annual inflation. If this scenario does not come to pass, it may become necessary to adjust the inflation prediction upward in the middle of the year.

The upward risks should be kept in mind as we contemplate the ways Latvia itself can influence the inflation processes. That implies continued work on reducing structural unemployment, allowing more entrepreneur involvement in the training process.

The fiscal measures taken (or not taken) during the rest of the year may to a great extent determine whether Latvia will succeed in meeting the Maastricht inflation criterion for introducing the euro in 2014: it is hardly an auspicious moment to review VAT taxes as some are suggesting by annulling the lowered VAT on some goods and services and thus raising the average effective VAT rate.