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Bank of Latvia

08.02.2010

Krista Kalnbērziņa, Bank of Latvia Economics Expert

The New Year was begun with a slight increase, 0.2%, in consumer price levels. That however does not mean that the prices have stopped falling, for in January several circumstances tend to combine to effect faster-paced price increases than at the end of the year. As the low demand and decreasing costs continued to determine the drop in prices for the majority of goods and services, this "January effect" was rather insubstantial. It mostly consisted of a seasonal increase in foodstuff prices as well as a significant rise in fuel prices.

Consumer prices continued decreasing year-on-year: price levels were already 3.1% lower than in January 2009. The drop in prices continues to reflect both demand- and supply-related factors; foodstuffs, various kinds of unregulated services, and administrated tariffs on energy resources have all been subject to price decreases. Yet the drop in the overall price level was significantly impeded by the increase in fuel prices, which already amounts to 30.9% year-on-year.

Moreover, the drop in the population’s incomes in 2009 had a significant impact on consumption scale changes, which serve as basis for calculating changes in price levels. As the population adapted to the situation and adjusted their expenditures, a comparatively larger part of expenditures went for essential goods and, for the first time since 2002, the share of food items and energy resources has grown in the basket of commodities while share of services has decreased. That means that the changes in prices of food and energy resources have a greater impact on inflation indicators than before.

In the near future, the weak domestic demand will continue to determine the drop in price levels and, if weak economic activity persists, the overall drop will continue throughout the year. In the other direction, toward increase, the overall changes in prices will be determined by supply-related factors, rises in prices of energy resources in particular; moreover, as mentioned above, their share in the basket of commodities has increased. Yet the depth of the price drop will to a large extent be determined by the possibilities of recovery both in Latvia and elsewhere. A return to a low inflation is expected by the end of 2011.