Price levels have nearly doubled in this century

About consumer price changes in December 2020

In December, consumer prices in Latvia were 0.5 per cent lower than a year ago which reflects the impact of the global economic crisis. Compared to November, the price level, however, remained the same, as the increase in transport and housing was offset by seasonal discounts on some non-food products. Consumer prices rose by 0.2 per cent in 2020, a result that has been expected since March, when we forecast such annual inflation, although in the meantime the forecast “floated” up and down by a few tenths of a percent. 

The monthly data (compared to November) show the usual economic activity without particularly bright and unexpected events. For instance, the increase in oil prices turned the fuel price curve upwards, however they are still below the pre-pandemic level. Weak demand, in turn, reduces footwear and clothing prices. In November (latest data), the sales of these goods fell by more than a fifth on the annual scale, while the sales of electrical goods grew by more than 40 per cent. Just as snowfall may come to Spain in the global warming era, some industries are doing well in the corona virus crisis, and the economic temperature map in Latvia is very contrasting. We can say that nothing special happened to prices in December. More specifically, consumer price data show nothing that could not be guessed before. The forecasts for price changes in 2021 have not changed either, the average inflation could be around 1.3 per cent.

This year, we will move from generally healthy deflation to generally healthy inflation. By “generally healthy” deflation in times of pandemic, I mean the fall in prices, which takes place in a way that is pleasant for the people of Latvia, as it is caused by the fall in import prices, and not the spiral of falling domestic income and deflation. Life activity declined, but wages per working hour increased. True that taking into account changes in working hours and the profit decline of capital owners, the total income was lower last year. However, such a decline has not been that sharp to decisively affect the consumer price index. Meanwhile, the rise in prices in 2021 will mainly be driven by the rise in raw material prices, however it is expected (as deals with the futures indicate) to be moderate, with the most important reference point for import costs or oil prices not coming back to the pre-pandemic level. In the world market of raw materials, there are relatively high prices for the goods we export, i.e. wheat and timber. There are different trends with respect to imported raw materials, fossil energy is still quite cheap, but metals are fast becoming expensive. The rise in prices will be moderately complemented by the economic recovery and wage growth, the impact of which will intensify strongly in 2022. Prices are expected to rise in the worst-affected sectors, first and foremost restaurants, as people will hunger greatly for entertainment, they will have "grown up" bank accounts, so they will not too much complain about prices in menus. 

Inflation in the Euro zone as a whole is too low and is likely to remain that at least this year and next year, although there are widespread concerns in the financial community about the effects of money printing. These concerns may materialize in the distant future. However, in the next few years, neither the prices of financial instruments nor the large spare capacity in the economies of Europe and other parts of the world indicate these risks.

New Year's Eve as well as the beginning of the new decade is a good time to look back at long-term economic trends. In 2020, the overall price level remained almost unchanged, at the same time it increased by 97.9 per cent since 2000, i.e. it almost doubled. In 2000, we were still living in a completely different economic reality - Latvia could then undoubtedly be called a poor country, about 40 per cent of our export of goods were mostly raw or low-processed timber, and the transit accounted for an even larger share of export of services. Today, the range of goods and services sold in the rest of the world is several times larger and more diverse.

Consequently, it is natural that, despite the increase in the cost of living, the level of real wages during this period has increased 2.7 times, while the nominal wages increased 5.4 times. Moreover, a much larger proportion of the country's population has a job, and despite the population declines, the number of jobs occupied has increased. 

Pēteris Strautiņš
Luminor Economist