Low-price basket and reduced VAT: Do they really save money?
Despite two mechanisms aimed at lowering food costs in Latvia, experts warn that the overall benefit may be limited, and global crises could drive prices up again.
In June, food retail sales in Latvia grew by 4.6% year-on-year, and total retail turnover increased by 4.8%, according to data from the Central Statistical Bureau. However, this rise in consumption does not necessarily mean lower prices—it rather reflects wage growth and recovering purchasing power, says Dainis Gašpuitis, chief economist at SEB banka.
Currently, two measures are in place to reduce household spending on food: the “low-price basket” and a reduced VAT rate on basic products. Ingūna Gulbe, head of the Agricultural Market Promotion Department at the Institute of Agricultural Resources and Economics, notes that the basket is tailored to the average Latvian, but the question remains whether general price increases will offset any savings.
Raimonds Okmanis, chairman of the Latvian Traders’ Association, dismisses concerns that retailers might compensate for lower prices by raising others. He insists that price hikes occur only due to objective factors, not as compensation.
However, the Middle East crisis poses future risks. Key food production resources pass through the Strait of Hormuz, and the fallout could reach Latvia. Gašpuitis predicts that the most significant impact will be felt next year, while this autumn largely depends on the harvest. If the harvest is favorable, the price increase may be marginal.
An objective assessment of whether savings from lower prices have been erased by increases in other products will only be possible in autumn, after analyzing several months of data.
