According to the Central Statistical Bureau, consumer price levels decreased by 0.5% in December 2022 compared to November 2022, being the sharpest price drop in December in the last eight years. The average price level decreased by 0.9% for goods and increased by 0.9% for services. The drop in prices of fuel, clothing and footwear, as well as the increase in prices of food and electricity had the main impact on price changes.

In December 2022, consumer price levels were 20.8% higher than in December 2021. In total, the annual average inflation in Latvia in 2022 was 17.3%. The most raid increase in prices in recent years was underpinned by the increase in energy and food prices enhanced by the Russian invasion of Ukraine and the subsequent sanctions, which caused a deficit of raw materials for energy, food and manufacturing.

During the year, the biggest impact on the average consumer price level came from the increase in prices of food, which is related to the increase in prices of these goods across the world. During the year, prices of food and non-alcoholic beverages in Latvia have increased by 29% increasing the total level of consumer prices by 7.4 percentage points. Prices of all food products increased with the biggest increasing effect coming from the increase in prices of bread and cereals, milk, cheese and eggs, as well as meat and meat products. Local changes in food prices are largely determined by global price fluctuations.

Since mid-2020, global food prices have been rising rapidly, driven by a sharp rise in import demand, delays in processing and transportation due to the shortage of labour force caused by Covid-19 and rising crude oil prices. The situation was worsened by Russia’s invasion of Ukraine in February 2022, raising concerns about future global food supplies, as both Ukraine and Russia are important manufacturers of agricultural products. In the first months of the year, global food prices rose sharply, with the food price index hitting a new all-time high in March. During the year, the most rapid price increase was recorded for dairy products and cereal crops, and more moderate – for meat and sugar, while vegetable oils decreased rapidly.

Since April 2022, food prices in the world have been gradually decreasing, so they have generally seen a moderate drop, by 1%, during the year. However, due to the rapid rise of previous years, prices still remained high. The price drop since April was driven by weak demand and a strong US dollar, as well as uncertainty in the market about the future direction of demand due to sharp inflation and an economic slowdown. In December 2022, compared to December 2019, global food prices increased by 31%. The increase in Latvia during this period was 39.8%.

A high increasing impact came from the increase in prices of energy sources related to housing – electricity, gas, solid fuel and heating energy that increased the overall level of consumer prices by 6.5 percentage points. The support measures introduced by the government to compensate for the rapid increase in energy prices from 1 January to 30 April 2022 and from 1 October to 30 April 2023 (for natural gas already from 1 July 2022) were important, partly compensating households for payments for electricity, natural gas and heating energy and thus slowing down even faster price increases in this group of energy sources. The practically constant increase in heating energy prices by up to 75.7% had the most significant impact during the year, which is attributed to the increase in prices of natural gas and wood chips.

As prices of wood products used for heating rose rapidly in the market, the increase in prices of solid fuels was significant, reaching 105.2% during the year with the most rapid rise in April-July. Natural gas tariffs were increased on January 1 and July 1 and during the year the prices of natural gas increased by 133.7% in total. This process was influenced by a sharp rise in natural gas prices on the exchange since autumn 2021. In 2022, prices continued to rise, largely due to Russia’s invasion of Ukraine and subsequent sanctions, when several countries terminated or restricted Russian gas imports. Gas supplies were also terminated at Russia’s initiative. The price increase for electricity – by 22.9% during the year – had a smaller impact. This indicator was significantly affected by the state support, both by compensating payments for distribution and transmission services at the beginning of the year, by cancelling the mandatory procurement component (MPC) from September 1, and partly by compensating the price for households for the first 100 kWh from October 1. In May-August, the price of electricity increased very rapidly in response to the increase in global natural gas prices, the unfavourable weather conditions for electricity production in Europe and the capacity restrictions of cross sections of the electricity transmission system between Latvia and other countries. This combination of circumstances led to a sharp increase in electricity prices on the exchange. Price increases were also influenced by the increase from September 1 of prices for Latvenergo customers using fixed tariff payments.

During the year, prices of services rose by 11.5%, which increased the overall level of consumer prices by 3 percentage points. The biggest impact came from the increase in the prices of housing-related services (water supply, sewerage services, waste removal), catering services and out-patient services, mainly dental and specialised medical services. Prices also increased considerably for recreational and cultural services (including recreational and sporting events, television subscription fees, cinema, theatre, concert visits), maintenance and repair of personal vehicles and mobile phone services.

Due to the rise in world crude oil prices, prices of fuel in Latvia increased by 17.9% during the year, increasing the overall level of consumer prices by 1.2 percentage points. Fuel prices rose particularly sharply in the first half of the year as following the fall in the last months of 2021 global growth of crude oil prices in the first months of 2022 was very rapid. The Brent crude oil price reached 130 US dollars per barrel, mostly influenced by the invasion by Russia, an oil-producing country, of Ukraine and the response of other countries: The US ban on Russian energy imports, the UK’s announcement on the abandonment of Russian crude oil imports by the end of the year, as well as discussions among EU Member States about imposing an embargo on Russian crude oil imports.

Global crude oil prices have been falling since the middle of the year, with the price of Brent oil slipping to around 77 US dollars per barrel in mid-December, its lowest level in 12 months. It was sparked by concerns about insufficient demand for crude oil as growth slowed across key economies, also influenced by decisions by central banks to raise interest rates to combat rising inflation. Overall, in December 2022, compared to December 2021, global prices of crude oil rose by about 9%.

There was also a significant increase in prices of alcoholic beverages and tobacco products, goods related to housing equipment and household appliances, personal hygiene products and beauty products, clothing and footwear, which together increased the total price level by 1.6 percentage points.

Consumer prices will stabilise this year. The main impact on price changes will continue to be linked to the rise in global prices for energy and food, and their downstream impact on prices of industrial goods and services will be observed. Taking into account the uncertain geopolitical situation and the base effect of inflation dynamics, total annual average inflation in 2023 is expected to be within 9%.