OREANDA-NEWS. January 13, 2009. Lately the inflation pressure in Latvia has declined significantly, and during 2009 the deflation will prevail, i.e. price decline in comparison with an average level of the previous month. The decline of consumption together with Christmas discounts furthered deflation also in December. The total rise of prices in 2008 comprised 10.5%, reported the press-centre of Latvijas Krajbanka.

There is no doubt that 2008 was unique in terms of inflation indices. In May inflation reached 17.9% (in comparison with the previous May), which was the biggest index since 1996. Nevertheless already by the end of the year the rate of inflation has decreased significantly, which was proved by unusual to Latvian economy deflation in November and December (in comparison with the previous month’s price level). 

Unfortunately the majority of Latvian residents don’t feel the deflation, because two groups that form the biggest proportion of expenses (i.e. - dwelling related expenses and prices to food products) are still continuing to grow. During the decrease of economic situation, which has influenced residents` welfare significantly, we have also experienced rapid increase of tariffs to utilities – by 20-60% on average. The prices to food grew by more than 10%. The tobacco and alcohol articles experienced the most rapid increase of prices (due to the increase of excise tax).

Interesting situation was observed on the world’s oil market: if in July oil quotations reached record high 150 USD per barrel, then by the end of 2008 it was only 40 USD per barrel. There is no surprise that despite the significant increase during the first half of the year the overall prices to fuel by the end of 2008 diminished on average by 15% in comparison with the previous year.

Speaking about this year’s inflation, it is clear that the increase of VAT rate in January and the excise tax rate increase in February will restrict the price decline observed during last few months. Nevertheless in the near months we will experience one-digit inflation figure. By the end of the year the inflation rate might be very low - under 3-5%. Still it is bitter to realize that this positive fact is related to tough economic situation in the country and significant decline of consumption.

Unfortunately, without knowing the plans of Latvian government regarding the support to entrepreneurship, and considering announcements about the possible another increase of the VAT rate it is hard to predict the inflation level at the end of the year.

On the one hand insufficient support to entrepreneurs and exporters via the aid of the part of the acquired international funding could cause unpredictably rapid economic decrease, which in its turn will increase the deflation tendencies. On the other hand the increase of VAT rate does not allow the entrepreneurs to review the price policy efficiently. Yet more – unfortunately, the information about the increase of VAT rate in January caused the essential price increase to separate goods and services, because entrepreneurs hope to compensate loss in such a way.