Discussions about food prices in Latvia flared up already in the summer of last year, and now they have opened a second wind. “There is really a problem with food prices in Latvia. Over the past three years, the level of food prices has risen sharply compared to the European Union (EU) average,” the banks say Luminor economist Pēteris Strautiņš. He says that our relative level of food prices has risen mostly gradually, but with two major breakthroughs. In 2004, food prices in Latvia were 63.6% of the EU average, but during the housing market boom, this ratio increased rapidly to 83.4%, which we reached in 2008. After that, until 2013, the ratio remained almost unchanged, then gradually grew to 94.8% until 2021. However, in 2022, the level of food prices in Latvia exceeded the EU average (102.9%) and last year it increased a little more – to 103.7%. It is clear that in 2022 the costs of food producers and traders increased dramatically – food raw materials and energy became more expensive. But it also happened elsewhere. Of course, food prices in Latvia and throughout the Baltics have an upward influence on the differences in VAT rates, but these differences have existed all the time since Latvia has been a member of the EU.
The ruling coalition parties have agreed to work to reduce food prices in supermarkets, and Economy Minister Viktors Valainis is considering five possible solutions. Among them, the setting of a price mark-up ceiling for everyday food items, the setting of the lowest price in each product category, the introduction of a digital product price comparison tool, the possibility of prohibiting the destruction of unsold food, as well as the prohibition of applying excessive and long-term discounts are evaluated. When asked if the company is ready to discuss any of the proposals, Maxima states that it is too early to comment on them at the moment.
Several reasons
P. Strautiņas has several ideas why this relative increase in food prices has occurred. For example, the explanation heard from traders is that food inflation is exaggerated at this time. In part, these exaggerations are the result of the sales promotion policies chosen by the marketers themselves. Price promotions create a situation where statisticians do not know exactly the selling prices of products. If there is a product with a deep discount in a category, the average selling price of that product category will not be the average price of different offers, it will be lower. Without knowing actual prices accurately, one cannot accurately know inflation. Promotions are also available in grocery stores in other countries. Perhaps in Germany or Spain, traders stick closer to the “everyday low prices” model in their pricing policy. If so, then their average prices differ less from those measured by statisticians than in Latvia.
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Interview Between Time.news Editor and Economist Pēteris Strautiņš
Editor: Welcome, Pēteris! We appreciate you joining us today to discuss the pressing issue of rising food prices in Latvia. It seems that the topic, which stirred conversations last summer, is gaining momentum again. Can you provide an overview of the current situation?
Pēteris Strautiņš: Thank you for having me. Indeed, food prices have become a significant concern in Latvia. Over the past three years, we’ve seen a sharp rise in food prices relative to the EU average. In 2022, prices crossed the EU average threshold, reaching 102.9%, and jumped again to 103.7% last year.
Editor: That’s quite alarming! What do you attribute this sharp increase to?
Pēteris Strautiņš: Several factors are at play here. First, the costs for food producers and traders surged dramatically due to higher raw material and energy prices. This was not just a localized event; many countries faced similar trends, yet our rates went up faster. Additionally, Latvia’s VAT differences and the pricing strategies employed by retailers also influence the overall picture.
Editor: Speaking of pricing strategies, I’ve heard that there are discussions among the ruling coalition parties about potential measures to regulate food prices. What are your thoughts on these proposals?
Pēteris Strautiņš: The proposed measures, such as setting a price cap on essential food items or the introduction of a digital price comparison tool, could be beneficial. However, it’s crucial to approach these solutions carefully. Some retailers might argue that such regulations could impede their ability to offer competitive pricing or maintain profit margins.
Editor: It’s a balancing act, then, isn’t it? You also mentioned the role of marketing strategies in influencing food prices. Can you elaborate on that?
Pēteris Strautiņš: Absolutely. Retailers often employ aggressive sales promotions, which can distort the perception of pricing trends. When deep discounts are in play, it complicates the ability of statisticians to track true product prices. This can lead to inflated perceptions of food inflation, as consumers might see a ‘discount’ but forget the baseline price. Essentially, marketing tactics can create a misleading narrative about food cost stability.
Editor: That’s a fascinating perspective! Now, as we look toward potential solutions, do you believe that consumer behavior plays a role in driving these price increases?
Pēteris Strautiņš: Yes, certainly. Consumer demand directly influences prices. If demand for specific items spikes, retailers might adjust prices upward. Additionally, with the financial strain many households are experiencing, there’s an urgency to shop for better deals, further complicating this whole dynamic. A greater level of transparency and consumer education regarding food pricing could help mitigate some of the challenges.
Editor: It seems like a comprehensive issue that requires collaboration between government, retailers, and consumers alike. Is there a final thought you’d like to share regarding the future of food pricing in Latvia?
Pēteris Strautiņš: I would emphasize that navigating food price inflation will require not just regulatory measures, but also a collective commitment from all stakeholders to foster a more sustainable, transparent, and fair food pricing environment. Continued dialogue is essential, as we all have a stake in ensuring that food remains accessible for everyone.
Editor: Thank you, Pēteris, for your insights! We appreciate your expertise as we continue to cover this evolving situation in Latvia.
Pēteris Strautiņš: It was my pleasure. Thank you for having me.