Latvia has one of the highest rates of inflation in the European Union – 21.3% – which was facilitated by the increase in the prices of energy resources and natural gas, which consistently raised the prices of other goods and products as well. Natural gas prices have increased almost 3 times compared to last year. Housing prices also continue to rise. The peak of inflation could be reached in the coming months, next year the prices of gas and energy resources could also decrease. Currently, the biggest threat to Latvia is the rapid rise in natural gas prices, which reduces the purchasing power of society and increases the risk of poverty.
All over the world, record high inflation rates are observed, fuelled by the consequences of the pandemic, as well as the geopolitical unrest that has shaken the world in 2022. Although the inflation indicators of the European Union are not as high as, for example, in Turkey, the increase in prices is felt and it is expected that the winter season will be a test of endurance for the entire European Union. The greatest difficulties for the population of Latvia will be caused by the increase in food prices and the increase in energy resources, which is already reducing the purchasing power of households, so this Latvia Economic briefing will present the levels of inflation in Latvia, the process of disconnection from the Russian gas networks, as well as the insufficient energy resources in Latvia.
I Inflation Rates
Changes in the prices of goods and services in Latvia during the last year are shown in Figure 1 below.
Source: Created by the Author using Central Statistics Bureau data, 2022
On average, consumer prices in the 27 countries of the European Union (EU) increased by 9.1%. As can be seen in the Figure 1, in August 2022, the prices of all goods and services in Latvia increased by 21.5%. In July 2022, Latvia had the second highest inflation among EU countries. Compared to the corresponding month of the previous year, the lowest price increase in Latvia was precisely for services – 9.1%. The prices of food products increased by 21.1%, while the average increase in the prices of all goods in the month of August was 26.1%. The prices of non-food items have risen the fastest – 30.3% – considering that the category includes energy resources and gas. Figure 2 below shows the increase in the prices of energy resources, gas and other fuels.
Source: Created by the Author using Central Statistics Bureau data, 2022
The peak of natural gas price growth was observed in July 2022 – natural gas prices increased by 191.2% compared to July of the previous year. The price increase in August dropped a bit, but prices still increased by 134.1%. In August 2022, the prices of electricity, gas and solid fuels have increased twice compared to the data of the previous year, heating prices are almost 60% more expensive.
In the 2nd quarter of 2022, compared to the 2nd quarter of 2021, housing prices increased by 16.5%, according to the preliminary data of the Central Statistics Office. During the year, prices for new housing increased by 13.8%, and for used housing – by 17.3%. In the 2nd quarter of 2022, compared to the 1st quarter of 2022, housing prices increased by 5.5%. New housing prices increased by 10.3%, and used housing was 4.4% more expensive. Compared to 2015, housing prices in the 2nd quarter of 2022 were 85.8% higher. Prices for new housing increased by 65.6%, and for used housing – by 91.6%.
The price increase in the last year for all goods and services has been very rapid, however, according to economists’ forecasts mentioned in the recent Latvia Economic briefings, the peak of inflation could be reached in the month of September 2022, after which inflation would decrease. Gas prices in Europe could fall in January 2023, predicts “Goldman Sachs”. The low-income segment of society suffers the most from the price increase, as well as people who earn the monthly minimum wage, which in Latvia is 500 euros – one of the lowest minimum wages in the European Union.
II Suspension of Russian Gas Imports
Latvia, Lithuania and Estonia are the first European countries that have completely given up Russian gas. Until the autumn of this year, the gas stored in the gas storage in Incukalni is enough for Latvia, but in the meantime, alternative supplies must be provided. There are opportunities to import gas through the Klaipeda gas terminal, as well as through the gas pipeline connection from Poland to Lithuania, which will be ready next May.
The issue of the liquefied gas terminal in Skulte should also be updated. Also, the planned construction of the Estonian-Latvian wind park in the sea near Ainazi should finally be seriously tackled. The government is already taking action to achieve sustainable energy independence as soon as possible. Latvia’s economy, like all of Europe’s, is oriented towards the fact that energy prices will rise significantly. Energy will never be as cheap as it has been. This is precisely why the European Green Deal is so essential for the economy to become truly sustainable, given the rising energy prices and the environmental damage of fossil energy sources.
The united and strong reaction of the Western world to Russia’s attack on Ukraine, by introducing sanctions against the aggressor and its supporters, will also bring about changes in Latvia’s economy. Independence and sustainability of energy supply, including investing in renewable energy resources, is one of those areas where the country has a lot of unfinished business. It is high time to act.
III Lack of Energy Resources
The price of electricity on the exchange depends on several factors, including the geopolitical situation, weather conditions, interstate connections and capacities of the electricity supply infrastructure, and other aspects. This year, record-high temperatures were experienced in Europe, which affected both water levels in hydroelectric power plants (HPP). An additional local factor that affected Latvia’s ability to produce electricity was the repair of the Daugava HPP hydro structures. Also due to repairs, the water level decreased, therefore large HPPs in Latvia could not store water to produce electricity during the peak hours of consumption, which would allow to increase the supply on the market and balance it accordingly. It should also be recalled that due to geopolitical factors, the availability of gas has decreased, as well as the import of electricity from Russia has been stopped due to the sanctions imposed on it. All of this has significantly affected the amount of available electricity and, accordingly, the price on the Nord Pool exchange. It must be said that the electricity price records resulted in a discussion about the principles of the current market.
The electricity market needs a structural reform. If we do not have the opportunity to produce all the necessary amount of electricity ourselves in the country, we must import the missing amount, and this should be done in accordance with the market structure and stock exchange rules. However, at the same time, in the current energy crisis, which was catalysed by Russia’s invasion of Ukraine, crisis solutions are needed. When it comes to electricity production in Latvia, we must continue the rapidly adopted course towards renewable energy resources (RES), because in fact price fluctuations on the market are caused by fossil resources, that is, their unavailability, as a result of which prices rise not only for these, but also for alternative resources, as they increase request.
In the upcoming heating season, the prices of products and services will rise, so both on a national scale and every individual should think about possible savings and energy efficiency measures. In this case, it is especially important to maintain the competitiveness of businesses, as well as to support the poor.
The growth of inflation in Latvia, which is one of the highest in the European Union, is primarily due to the rapid growth in energy resources. In order to reduce the impact of high energy prices on citizens and entrepreneurs and limit price increases in the upcoming heating seasons, the Latvian government should address the problems in the energy sector as quickly as possible. It is important to ensure the availability of energy resources in the next heating season and mechanisms to limit the growth of their prices. And also work on more effective solutions to identify and reach the population, especially the poor, who are in vital need of state assistance in compensating the costs of energy resources.
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Original article on the China-CEE Institute website – https://china-cee.eu/2022/09/20/latvia-economy-briefing-inflation-in-latvia-among-highest-inflation-rates-in-the-european-union/