The development of the Latvian economy and inflation rates depend on further events in the war with Iran, writes Diena.
Currently, the risks indicate a noticeable, albeit limited, impact on inflation and economic growth. The longer the restrictions in the Strait of Hormuz persist, the stronger their effect will be.
Economist at "SEB banka" Dainis Gašpuitis notes that the global economy has a time buffer before the worst-case scenario occurs - approximately up to two months. If the conflict is not resolved within this time, the situation in the economy and future forecasts will worsen significantly.
"The inflation outlook in Latvia will remain tense in the coming months, even if hostilities in the Middle East cease," states the chief economist of "Citadele" Karlis Purgailis.
Data on consumer prices in March show that inflation in Latvia is gaining momentum: prices rose by 1.9% over the month, marking the fastest increase since mid-2022. In March, the most significant impact on inflation came from transportation-related prices. However, high oil and gas prices have already become embedded in the cost structures of many sectors, and this effect spreads through the economy with a time lag.
Price increases will not be as dramatic as the inflation spike in 2022-2023; however, according to Gašpuitis, they will be quite unpleasant as they will affect the most sensitive categories for the population - energy resources and food products.
Energy infrastructure in the Middle East is already damaged, and the risk of further destruction remains. Therefore, even if the issue of the navigability of the Strait of Hormuz is resolved, the influence of geopolitical risks on oil and gas prices will persist for a long time.
The inflationary impulse has formed, so the impact of these events on heat energy prices in the next heating season should already be considered. Stress in the system may persist for a long time, especially if a peaceful resolution to the conflict cannot be reached, which is quite likely.
Back in March, the chairman of the board of "Elenger" Davis Skulte predicted that a return of natural gas prices to pre-war levels is not expected this year. As the new heating season approaches, prices are likely to rise. There is no longer an excess of gas in the market, and significant supply disruptions are observed in Qatar, one of the largest suppliers of liquefied natural gas. As a result, increasing pressure will remain in the oil and natural gas trading segment in the second half of the year.
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