In April of this year, prices increased by 2.2% compared to the previous month. On average, in the previous 10 years, prices in April increased by only 0.4% on a monthly basis. Monthly inflation in April was lower than in March (3.3%), but there has been another “abnormal” rise in prices, pushing annual inflation from 11.5% to 13.0%.
There is another month to go through with a very sharp increase in the cost of living due to the end of residential energy price subsidies in May. Already from June, the price increase will gradually calm down, the annual inflation will continue to rise until autumn, but much more gradually. The prices of raw materials on world markets have been fluctuating around one point for two months.
This does not mean that the rise that took place until the beginning of March has already been fully reflected in consumer prices, but the worst moment will have been overcome by the summer. In this sense, however, we are a haven of peace against the background of the Baltics: inflation in Estonia has reached 18.8%, and in Lithuania – 16.8%. However, the rapid rise in prices is undeniably Latvia’s biggest socio-economic problem, which will dominate the public agenda throughout this year, especially during the election campaign.
The emotional shock of the public is very well understood, the price increase during the year (13.0%) is almost as fast as in the previous ten years in total – in April 2021, compared to April 2011, the price level increased by 14.2%. In the previous decade, there were four years when the price level barely changed, with average inflation at 0.0% or 0.2%. Both in annual and monthly terms, food had the greatest impact on the overall price level – its impact was 4.46 and 0.95 percentage points, respectively.
During the year, the consumer price index was strongly influenced by the two “energy” positions – housing and transport, by about three percentage points. The annual impact of other main expenditure items was relatively small against this background, up to 0.5 percentage points. During the month, clothes and shoes also had a rather strong impact (0.45 pp), it has a seasonal character. Annual inflation of food and non-alcoholic beverages increased particularly sharply, to 17.4% from 14.7% in March. In this category, the price increase during the year was higher than in the entire previous decade (16.1%). Gas and heat cost even cheaper last year than in April 2011 – 5.2% and 7.9% less, respectively. Transport costs were almost unchanged over the previous decade, rising by 1.5%. In the latest data, the annual inflation of gas and heat prices is 71.1% and 27.9%. Transport has become more expensive by 24.9% during the year.
The increase in food prices in the category of food and non-alcoholic beverages on a monthly basis (3.6%) was the fastest since the nineties. Personal observations in such situations cannot be reliably relied on, but currently it seems that the increase in food prices in May has calmed down.
However, there is no doubt that at some point in the future, meat prices will increase significantly, the current level being unsustainable after the doubling of grain prices on world markets. However, you should not be influenced by panic about the fact that food prices will increase by another 50% – this will not happen. This could increase the prices of individual products, but not the average food.
Industry representatives try to influence consumer perception in public communication, this should be kept in mind and evaluated with skepticism. Expensive support programs will be needed to mitigate the effects of rising prices. The impact of rising food prices can be mitigated by providing assistance to people on low incomes. However, the increase in heating prices in some populated areas, as well as the increase in gas prices throughout the country, will be so drastic that it will most likely not be enough.
Therefore, I expect that energy (heat, maybe also gas and electricity) price subsidies will be introduced again in the fall. The “ceiling” of energy prices set by the state should not be as low as in January – April, when they created the illusion of security.
Politicians at the national level will have to deal with problems caused by local inaction – not changing energy sources and not insulating houses, combined with the global energy price crisis. In places where heating depends on gas, the government will have to “cut off” the sharpest edge of the increase in heat prices, but the help for these places should not be so generous as to encourage them to not change anything and heat at the expense of taxpayers.
In cities and villages, where heating is based on wood chips, there is no heat subsidy and will not be needed. Costs will also increase in heat supply systems where wood chips make up 100% of the primary energy, as the price of wood chips has roughly doubled over the year. Tariffs in the next season there could be around 70 euros per MWh instead of the usual ~50 euros. It will be the historically highest heat price in these places, but the burden of heating costs as a share of income will be much lower than 10 years ago – unpleasant, but not a disaster.