Monetary policy has mitigated the toll of inflation

Only a few days ago, we wished each other a happy New Year. With the year behind us, we reflect on the events and achievements that shaped it.

When it comes to inflation, 2023 has been calmer than the previous year. Nonetheless, there was no shortage of challenges, and this gives us a sense of a job well done. Inflation shrank from more than 20% at the beginning of the year to below 1% at the end of that same year. Latvia's inflation stood at 0.6% in December, representing a 0.8% price decline month-on-month.

The decrease in inflation was due in part to relatively lower energy prices, but monetary policy has also played a significant role. Would the year-end prices have increased at a slower rate than those at the beginning of the year, were it not for monetary policy? Certainly, but inflation would have been higher. 

Latvijas Banka's assessment suggests that, as a result of the European Central Bank raising its interest rates, Latvia's average inflation in 2023 was 2 percentage points lower than it would have been in a scenario without such action. Moreover, should the issue be left to resolve itself, without any monetary policy interventions, additional risks of protracted high inflation would remain in the longer term. This is certainly not something to wish for as we enter the new year.

The beginning of 2024 has already shown us that we should expect new challenges. We are currently facing the issue of supply chain disruptions in the Red Sea. Latvia is far enough from the place of those incidents. Still, more than one tenth of the globally traded goods are shipped along this route, with some of them being transported to Latvian producers, sellers and consumers. These restrictions mean longer delivery periods and additional costs.

Latvijas Banka projects that consumer prices in Latvia will increase by 2% in 2024. The previous upswing in prices was largely driven by a rise in energy prices. Currently, however, the reasons for price hikes are manifold and have more do to with higher wages.

Meanwhile, a steeper surge in inflation is held back by relatively weaker economic growth. Be that as it may, the risk remains that particular events somewhere in the world could increase the price volatility of individual products.

You can find more economic forecasts and analysis at the Latvian central bank's dedicated website

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