Digging into the inflation numbers: Many unpleasant discoveries

Inflation started to take off about two years ago. In this column I try to dig a little deeper into the numbers of those two years. The conclusions are mostly well-known but here they are anyway.

Conclusion 1) In terms of the EU, Eastern European countries were hardest hit.

Conclusion 2) Inflation numbers for different goods and services are very diverse with energy and food components the hardest hit.

Conclusion 3) With energy and foodstuffs being basic necessities, this has been very painful for many.

Yes, sorry, mostly well-known but here are the numbers presented in some graphs and tables and with a few extra comments.

Figure 1 shows inflation for the two-year period of May 2021 through May 2023, latest available data for all EU27 countries. The ten hardest hit countries all lie in Eastern Europe, therefore Conclusion 1). Reason: Energy and food, the main inflation drivers, are a bigger share in the consumer basket of those countries due to generally lower income per capita. Portugal is at the same level of income as the Baltics but energy is a smaller share of the consumer basket due to warmer weather.

Figure 1: Cumulative inflation, May 2021 – May 2023, EU27

Source: Eurostat

In Table 1 below I have calculated inflation rates for the 12 main commodity groups (ECOICOP) in Latvia for the periods May 2021 – May 2022, for May 2022 – May 2023 as well as the total inflation rates for the two-year period. I guess no one is surprised to see energy (commodity group 04) displaying the highest price increases with food (group 01) being in second position. Food requires energy for production, transportation from producers to supermarkets and often for storage (refrigeration, for instance) – higher energy prices, higher food prices.

But one can also see that inflation is broad-based. All main groups are up significantly, although very differently as per Conclusion 2).

Table 1: Inflation rates for various products from the Latvian Consumer Price Index, May 2021 – May 2022, May 2022 – May 2023 and May 2021 – May 2023

Inflation rates for various parts of the Consumer Price Index in Latvia	May 2021 – May 2022	May 2022 – May 2023	May 2021 – May 2023
Inflation, total	16.9%	12.1%	31.0%
Goods	20.3%	12.4%	35.2%
Services	7.1%	11.1%	19.0%
01 Food and non-alcoholic beverages	18.2%	17.9%	39.3%
02 Alcoholic beverages and tobacco	5.6%	8.5%	14.6%
03 Clothing and footwear	6.1%	2.9%	9.3%
04 Housing, water, electricity, gas and other fuels	34.5%	24.8%	67.8%
05 Furnishings, household equipment	9.7%	9.2%	19.8%
06 Health care	6.4%	10.4%	17.5%
07 Goods and services related to transport	27.5%	– 7.3%	17.7%
08 Communication	1.1%	6.2%	7.3%
09 Recreation and culture	5.1%	11.3%	17.1%
10 Education	– 0.7%	12.6%	11.9%
11 Restaurant and hotel services	12.0%	17.4%	31.4%
12 Miscellaneous goods and services	12.7%	14.2%	28.7%

Source: Latvia’s official statistics portal and own calculations

The Official Statistics Portal of Latvia provides monthly price developments for close to 300 sub-groups of goods and services. In Figure 2 I show the ones that have seen inflation above 50% for the period of May 2021 through May 2023. No fewer than 14 such entries prevail with natural gas, heat energy and electricity in top four. Hotels and motels are up; I presume partly due to suppressed prices during Covid. I have no idea about motor vehicle insurance but all the other entries are food products of which many are very basic necessities (my life is not the same without pasta), supporting Conclusion 3).

And pasta is actually a good example: It takes energy and flour to produce it, both of which are up in price. It is often produced far away (say, Italy), which makes transportation to Latvia more costly than to, say, Germany. Being somewhat peripheral in Europe hurts in a situation like this.

Figure 2: “Top scorers” – sub-product groups with inflation for May 2021 – May 2023 above

Source: Latvia’s official statistics portal and own calculations

And just to enhance my Conclusion 3): What about goods or services that either did not go up all that much in price or even saw their price fall? The top 10 (or bottom 10…) of those is presented in Figure 3.

Some goods actually saw prices decline but we are hardly talking about basic necessities here – except perhaps, with sad numbers like the ones presented here, the last one which is alcoholic soft drinks…

Figure 3: “The bottom” – a top 10 of goods and services with the lowest price increase in Latvia, May 2021 – May 2023.

 

Source: Latvia’s official statistics portal and own calculations

Conclusions have already been drawn and they are quite gloomy but well-known.

A positive (desperate…) comment could be that with the deterioration of purchasing power that has taken place in the past two years, it is quite amazing that the economy is not in recession.

Morten Hansen is Head of Economics Department at Stockholm School of Economics in Riga and former Vice-Chairman at the Fiscal Discipline Council of Latvia.