The Fragility of Price Stability: When the ‘House of Cards’ Collapses
For a period, it seemed that strategic agreements and government interventions were successfully curbing the cost of living. However, as Ingūna Gulbe from the Institute of Agricultural Resources and Economics suggests, the “house of cards” that was built to maintain low prices has essentially collapsed.
The volatility of global energy markets, particularly conflicts in Middle Eastern oil and gas fields, creates a domino effect. When the foundational costs of energy spike, the stability of food prices and consumer goods becomes an illusion. This shift indicates a transition from a period of managed inflation to one of unpredictable volatility.
The Hidden Ripple Effect: From Oil Fields to Synthetic Fabrics
Most consumers associate oil price hikes with the petrol pump or heating bills. However, the trend is far more pervasive. Normunds Bergs, chairman of “SAF Tehnika,” highlights that oil and gas are raw materials for a vast array of products, including synthetic fabrics.
The impact extends even into high-tech sectors. For instance, the production of semiconductors relies on helium, with Qatar being a major supplier. When geopolitical instability hits the Persian Gulf, it doesn’t just raise prices; it creates genuine product deficits. Businesses may be forced to stop producing lower-margin goods to focus on those they can sell at the highest possible price.
The Battle for the Low-Cost Food Basket
There is a growing tension between food producers, retailers and government mandates. The memorandum signed on May 27 aimed to ensure the availability of basic food items at low prices. While the Ministry of Economics, led by Viktors Valainis, sought to expand this “low-price basket,” the reality on the ground is different.
Ināra Šure of the Latvian Food Enterprises Federation notes that producers are now facing “astronomical” and unpredictable costs for raw materials and transport. Many producers have already exhausted their contractual limits for price increases, leading to difficult renegotiations with retailers.
Tax Adjustments: A Temporary Shield?
To mitigate the blow to consumer wallets, the government has implemented VAT reductions. Specifically, the rate for flour, milk, poultry products, and fresh eggs is being reduced from 21% to 12%.
While such measures are designed to brake price increases, history suggests a complex outcome. As seen with previous fuel excise tax reductions, prices can still rise despite tax cuts if global market pressures are strong enough. The primary challenge now is ensuring these tax savings actually reach the final price on the store shelf.
Beyond the Conflict: Other Drivers of Inflation
While the Middle East crisis is a primary catalyst, other factors continue to push prices upward. Inese Pētersone of RIMI Latvija points to biological and environmental factors, such as bird flu outbreaks in Poland—where 2.2 million laying hens were culled—which directly impacts egg prices.
Similarly, fish prices are rising not just because of energy, but because resources are physically depleted, leading to strict fishing quotas. This suggests that the future of food security will be a battle against both geopolitical instability and environmental limits.
Frequently Asked Questions
Government agreements (like the May 27 memorandum) provide a framework, but they cannot override the “astronomical” costs of raw materials and transport dictated by global energy crises.
The VAT rate is being lowered from 21% to 12% for flour, milk, poultry products, and fresh eggs.
Oil and gas are used to produce synthetic fabrics and other chemical-based products. Critical gases like helium from Qatar are essential for semiconductor manufacturing.
Retailers like Maxima and RIMI report receiving early signals from partners about price hikes, though they often attempt to moderate these changes to avoid alarming consumers.
What are your thoughts on the current price trends? Do you experience the impact of the “low-price basket” in your daily shopping? Share your experience in the comments below or subscribe to our newsletter for more economic insights.
