Flash Comment - June 8, 2011
Latvia: CPI annual growth is about to peak
Latvian CPI rose by 0.4% mom (5% yoy) in May 2011, mostly driven by higher food prices. In the recent months inflation was growing rapidly, for instance, in December 2010 it was only 2.5% yoy. However, we are of the opinion that annual inflation rate is about to peak. Most likely it will exceed 5% in the nearest months and stay there for a while, but diminish again somewhat in the end of the year towards ca 5%.
CPI is driven by developments in the global markets, local tax hikes, slow recovery of household consumption and increasing inflation expectations. It should be emphasized that demand side is still weak and is not the main driver of inflation. As global commodity price growth is expected to decelerate and taxes most likely will not be raised (at least not VAT and excise), CPI inflation is forecast to decelerate next year. However, uncertainty with regard to global commodity prices remains.