The average inflation indicator in Latvia for the year 2012 may be forecasted at approximately 3%. As far as groups of products and services are concerned which may experience the most dramatic price increase and reduction in terms of percentage, only two sectors can be mentioned for sure at this point: housing and communications.

Household related expenses will certainly continue to rise in Latvia in 2012, despite the fact that new higher tariffs of such utility suppliers as Latvenergo and Sadales Tikls were introduced in 2011 and that the 2011/2012 winter most probably will be much warmer than last year. The reasons for the escalation of expenses are a higher real estate tax and higher prices on gas and heat (which had an impact both on renewal of the gas excise tax and cancellation of the reduced rate VAT on gas).

On the other hand, the competition of Internet service providers in Latvia will increase and development of these services will continue (for example, optical Internet still is not available in some districts of Riga, let alone outside the capital city), which is why we can expect a further drop in prices for such services. The process of price reduction in this sector has been observed since 2000.
 
If the world won’t have yet another war (for example, in Iran), there will be no stimulus to raise prices on fuel in the circumstances of overall economic stagnation. However, currently fuel prices in Latvia continue to climb. Therefore, we can theorize that prices for transport services and – indirectly – food prices will grow (which was seen in 2011 as well). Today it looks like V.Dombrovskis’ government is not interested in continuing raising any taxes and because of that it is not likely that prices on alcohol and tobacco will go up in the foreseeable future. The excise tax was increased in 2011.

It is quite possible that clothes and footwear prices will drop this year (as happened in 2009 and 2010), if the stagnation process touches economies of other countries, which will push foreign exporters to lower prices. On the other hand, consolidation of the state budget will continue, which today does not leave room for hopes that education prices will go down (as happened in 2011).

Taking into consideration the forecast for the 2012 consumer price index, Latvia will have difficulty to comply with Maastricht criteria, although it is not impossible, since it will have to fit approximately in the aforesaid 3%. Latvia heavily depends on global prices on commodities and goods, first of all on prices for all kinds of fuel. Consequently, almost any category of products critical for the consumer – food, transport or housing referred to earlier – may become a stumbling block.


Konstantin Shavkunenko
Senior Financial analyst