Latvia's food prices fell in July after VAT cut, but fuel may rise again in August

According to the Finance Ministry (FM), citing Central Statistical Bureau data, Latvia's consumer prices fell 0.7% in July compared to June — the first monthly decline recorded this year. Annual inflation remained positive at 2.6%, but that marks a notable slowdown from earlier months, when the yearly rate reached as high as 3.5%.

Effect of the VAT cut

The main driver of the price drop was the reduction of VAT from 21% to 12% on several staple food items, effective July 1. Bread prices fell 5.8%, eggs dropped 7.6%, poultry fell 8.0%, and milk declined by as much as 12.8% compared to June. The ministry notes that for most of these products, the actual price decline exceeded the initially projected 7.4% drop, with bread being the exception. However, FM cautions that other factors also played a role, including retailer promotions and fluctuations in international commodity markets driven by harvest volumes, energy costs and demand.

Fuel prices and future risks

Fuel also became cheaper in July, down 3.5% from June, though it remains 9.9% more expensive than a year earlier. This annual increase is smaller than in spring, when it approached 30%. In July, diesel averaged €1.688 per litre and 95-octane petrol averaged €1.736 per litre. The ministry warns that renewed military activity in the Persian Gulf has already unsettled oil markets, and fuel prices are expected to rise again in August.

Labour market backdrop

The ministry notes that amid the focus on energy and tax changes, labour market trends have received less attention. While wage growth pressure has eased somewhat compared to previous years, average gross wages are still projected to rise by 5.5% this year, which will keep services inflation elevated — in July, service prices rose 5.9% year-on-year.