Swedbank: Latvia's Food Price Decline Will Be Short-Lived as Inflation Picks Up This Winter
Swedbank's chief economist in Latvia, Līva Zorgenfreija, expects inflation to accelerate this winter, with food inflation returning next year. The bank's economic review also projects slower growth in purchasing power and further interest rate hikes.
Falling food prices in Latvia are currently holding back the overall rise in the cost of living, which is why inflation this year is lower than last year. According to Līva Zorgenfreija, chief economist in Latvia at the Swedish bank Swedbank, the relief will not last, as inflation will accelerate this winter. The forecast is part of the bank's economic review.
Why prices will rise
Surveys show that more companies intend to raise prices in the coming months than did in the summer. The Hormuz crisis continues and global energy prices are higher than forecast, so Latvia will most likely see further increases in heating and gas tariffs. Wholesale electricity prices are climbing sharply, but most residents will feel this only gradually, because 85% of households have fixed-price contracts.
Global food prices are rising again, and in July 2027 the temporary reduced VAT rate on certain food products in Latvia will expire. As a result, food inflation will return next year. Swedbank forecasts that average inflation in 2027 will exceed this year's level, although the wave of price increases should fade over the course of the year.
Interest rates
To prevent inflation from becoming entrenched, central banks have begun raising interest rates and will continue to do so. The US Federal Reserve and the European Central Bank (ECB) will raise rates in December and again in the first quarter of next year. The ECB's overnight deposit facility rate, closely tracked by Euribor, which matters to borrowers, will reach 3.0% next year. The ECB is expected to start cutting rates gradually in 2028.
Economic growth
Latvia is the fastest-growing economy in the Baltics this year: in the first half of 2026, gross domestic product grew by 3.2% year on year. Goods exports have increased and, for the second year running, manufacturing output is growing rapidly, though export growth may slow next year as trading partners are expected to grow more weakly.
Consumption is growing faster than before and made the largest positive contribution to GDP. At the same time, wage growth has slowed, especially in the public sector. The average wage growth forecast ranges from 5.0% this year to 6.0% in 2028, which, combined with higher inflation, means slower growth in purchasing power than in previous years.
Investment is higher than last year, mainly thanks to public projects, including the Recovery and Resilience Facility. EU investment funding will decline going forward. In the bank's view, the new government's priority will be limiting spending; reducing the budget deficit is a prudent step, but there is a risk of overdoing it, as Estonia did a few years ago, when it helped stifle growth.
