Home Consumer resources The economist explains the link between gas reserves and rising consumer prices? – Baltic News Network

The economist explains the link between gas reserves and rising consumer prices? – Baltic News Network

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Although Latvia is once again under a strict curfew due to Covid-19, which many say has taken away the already gray fall colors, it’s possible people will conclude that this year has been ” blessed ”. In the near future, residents and businesses of Latvia will suffer the consequences of the dramatic rise in the prices of natural resources. The price hike will have a direct impact on some sectors, such as the energy sector, and some indirectly, said Citadele Bank senior economist Mārtiņš Ä€boliņš.

Transportation and logistics costs will increase, as will all costs for production, postage and other services.

The economic recovery from the fall caused by the pandemic will be very rapid, but it will not benefit residents’ wallets, says boliņš.

“If we look at the economy as a whole, it continues to recover from the pandemic. The process is surprisingly fast and at the same time dynamic in most countries of the world. ”

“Latvia’s GDP indices have returned to their pre-pandemic level. Registered unemployment is below 6%. Yes, the shocks have been significant, and the recovery continues at the expense of government support, the budget deficit and rising government debt. At the same time, inflation is faster than what we have seen since 2008. It is around 5%. The increase in production costs is even more considerable and already exceeds 20% ”, specifies the economist.

Natural resources, oil, natural gas, food, metals, timber and electricity in Europe in the past month and a half. All of this makes goods and services more expensive.

There are several reasons for this.

Sudden inflation – basic reasons

First, at the start of the pandemic, the outlook for declining consumption was similar to the financial crisis observed in 2008 and 2009. However, the decline was followed by an unexpected and unpredictable increase in demand, which the production and logistics could not keep up. with. People want to have it all now, there is a shortage of goods and problems with reasonably priced deliveries. Even Latvia is experiencing rising prices for energy, fuel and electricity.

While the tight curfew complicates the situation in the labor market, sectors that are not impacted by Covid-19 – industrial production, IT, etc. – experience stable salary growth of 6 to 7%.

However, in addition to the increase in wages, we can see an increase in the costs of transport, energy resources and labor. This means that the pressure is increasing on domestic service prices, which have remained stable so far, keeping service price inflation at 2%. That will change, however. In September, Latvian inflation was slightly below 5%. But by the end of the year, it will likely reach 6%.

If the winter turns out to be severe and the prices of natural resources continue to rise, consumer price inflation could reach up to 10%.

The increase in the price of natural resources is the second reason for inflation, and it is caused by the low level of resource reserves in many regions of the world. You might think where the problem is – there was oil, gas and coal in the ground before the pandemic and they still are. However, demand returned faster than expected. Last year, people’s mobility was reduced by the pandemic. Demand has also fallen. Russia, the United States and the OPEC countries have also decided to reduce their oil production.

Currently, demand is high, but OPEC countries are in no rush to increase production.

All of this has an effect on fuel prices, which in turn affect anyone who needs to transport goods or services.

India and China have reduced coal mining due to the push towards green energy and problems caused by climate change: the cold winter has increased energy demand and the windless summer has reduced energy production in Europe, which, in turn, caused demand for fossil fuels to increase. However, it is not possible to increase resource extraction quickly enough to meet demand on the same day. This is why low coal reserves increase the prices of natural gas, which then increase the prices of other goods, as the by-products of natural gas production are also widely used in chemicals, mineral fertilizers, plastic, synthetic clothing, packaging and manufacturing other products, says Economist of the Citadel.

If we generate electricity in Latvia, why are the prices going up anyway?

Latvia is one of the few countries to generate electricity from renewable energy resources. In the case of Latvia it is water, for Lithuania and Estonia it is wind power. However, this does not mean that Latvia is protected from external price fluctuations.

During the spring floods, Latvia exports electricity. In August and September, when the drought sets in and water levels drop, Latvia imports electricity instead.

However, the wholesale price of electricity is dictated by the last unit of natural gas produced, which is the fluctuating part of the price – energy that cannot be produced using water or electricity. ‘wind power. If the price of gas increases, so does the price of electricity.

What is the link between natural gas reserves and rising service prices? For all of the above reasons, the rise in producer prices is faster than the rise in consumer prices. The longer the prices stay high, the more it becomes clear that the capacities of the different companies to cover the price increase are limited. That is why next year will become a year of high inflation, which should stand at 4%, according to boliņš.

He adds that the good news is that the price hike will not continue all year. At the same time, the price level will not return to its previous level. This means that the service providers will have to adjust the prices according to the price changes.

So what ?

It is likely that the effect of the strict curfew on the economy will prove to be much more dangerous in the long run than in the immediate future. The GDP will not shake too much, as Latvia will again borrow money to make up for the losses.

Nevertheless, multiple problems will emerge after the pandemic: reduced activity of foreign investors in Latvia, a sustainable distance education scheme will have an impact on children’s knowledge and their competitiveness in the labor market.

It is possible that after several years, countries that no longer fall under the curfew regime will lead Latvia in terms of development.

But the picture is not all gloomy. Yes, like it or not, people will have to pay more, but inflation will be offset by wage growth. At the same time, the economy will continue to grow and will not cause a lot of headaches in the near future. Nonetheless, Latvia will need to think more carefully about the issues that have mostly gone unresolved during the pandemic – demographics, the EU’s green targets, etc., emphasizes the senior economist.