Banks, Direct Speech, Economics, Financial Services, Inflation, Latvia

This stabilization supports my previous projections. The current trends in global oil and food prices point to inflation diminishing in the coming months.

At the beginning of May, the Brent oil price dropped slightly under 50 US dollars per barrel. That is the lowest level since last November when OPEC agreed to reduce oil production to bring the oil price up. The OPEC countries by and large honour the agreement; in addition, Russia cut its oil production as well. Yet as of mid-March, “bears” have been dominating the oil market and the price of oil, albeit with substantial fluctuations, is on a downward trend. 

The news background supports this – oil inventories keep regularly exceeding investor projections and the USA is expanding its oil production (expressing readiness to increase it even more). Even if at the next OPEC meeting (25 May) a decision is adopted to extend the reduced production for another six months, the price of oil is not likely to rise substantially if the USA manages to convince investors of its readiness to keep increasing its oil production. Therefore, judging by the oil futures, investors are currently not expecting a rise in oil prices in the medium term.

The price of fuel could therefore drop slightly in May (in April the price of 95 octane petrol was stable, hovering around 1.16 euro per litre). Natural gas and heating energy (their prices are tied to the price of oil products in the previous 9 months), albeit pricier this year than last, will still cost less that could have been expected a few months ago. In the assessment of the Social Services Regulatory Commission, because of the appreciation of the services of the gas transmission services, natural gas tariffs could rise by 4% or less. In our assessment, the impact on inflation in this case could be about 0.1 percentage point (a rise of oil prices by one US dollar would have a similar impact).

In April, global food prices dropped for a second consecutive month, which, in the coming months, will have an effect on the retail prices of food. Last year’s cereal harvest was record high, and this year the harvest is expected to be almost as good. Thus, the amount of cereals supply could exceed consumption for a fifth consecutive year, with cereal inventories close to their historical high. With global supply on the rise, world dairy product prices dropped to a six-month minimum. World sugar and vegetable oil prices have also dropped substantially, but retail prices did not managed to reflect that already in April.

If increased economic activity will push labour costs to rise a little faster, the impact of domestic demand on inflation (which currently is not felt) could increase. However, even in such case, the stabilization of world oil and food prices will keep this year’s inflation within the previously projected range.