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Thursday, January 10, 2008

Latvia Inflation December 2007

Latvian inflation accelerated in December to the fastest pace in over 11 years as household expenses and service prices in restaurants advanced, adding to concern the economy is overheating. The rate, the highest in the 27-nation European Union, rose to 14.1 percent from 13.7 percent in November, the Statistical Office said today. Consumer prices rose a monthly 0.7 percent, compared with 1.4 percent in November.

Goods price inflation was 13.2% and services inflation 16.4%. Administered prices were up 16.5% on the year. The price growth of food products and goods and services related to the housing had the greatest impact on the consumer price increase in 2007. During the year the average price level of food products increased by 19.9%. The prices of bread, cereal products, confectionery, milk and dairy products, cheese, eggs, meat and meat products, oils and fats, fruit and soft drinks all had steep increases.

Household costs such as gas, electricity and water rose an annual 21.3 percent in December, the steepest gain of any category in the index. Services at restaurants rose an annual 21 percent.


Really I haven't got a lot more to say about all this over and above what I said in my more substantial analysis of Estonia earlier in the week:

So what happens next? Well obviously all of this is completely unsustainable, especially as most of the EU10 and Eurozone countries (not to mention the UK) are all now themselves likely to slow significantly. So now, to answer my own question a hard, hard landing seem unavoidable. How will this manifest itself? well basically we should expect to see increasing pressure on the Kroon currency peg with the euro, a pressure which, in the short term at least, the Estonian authorities will try and resist.

Basically, if we get the kind of very hard landing I am now anticipating, then we should expect to see inflation gradually ease, since there will be no demand pressure to push up prices. Possibly we will even see the reverse side of the coin, namely price deflation as we get into the second half of 2008, everything here depends on the pace of the "bust".

The only real issue in my mind is which of the group who are nearest to the cliff - Latvia, Estonia, Lithuania, Bulgaria, Hungary, Romania - will be the first to go over the edge. But perhaps the expression "canaries in the coalmine" first used by Morgan Stanley's Oliver Weeks is very appropriate here. Since why did the Baltic canaries start swooning in the first place? Why was there a lack of oxygen to ventilate the mineshaft? Bigger forces are evidently at work here, and we have Poland, Ukraine, Russia and China queueing up (more or less in that order) to put all the various theories to the text. And what is the ECB doing? My colleague Claus Vistesen made the following very valid point yesterday:

Eastern Europe? Could Trichet mention Eastern Europe tomorrow? I would seem strange but my feeling is that this is now set to crack at least in some of the countries. As such, the whole Eastern European situation could very well spill-over into the Eurozone through transmission mechanisms from Germany/Italy to Eastern Europe as well of course those famous Austrian/Swiss banks who have been supplying loans denominated in Euros and Swissies. In general on Eastern Europe you should not miss Edward's recent piece on Estonia which convinces me that this is about to go. The only question is whether we will see an orderly slowdown which I certainly hope but if currency speculation and runs on the pegs start to float on the jungle drums it could get out of hand and this would require the ECB to take action I think. Yesterday evening I updated my charts on Lithuania and despite a rather dubious spike in Q3 GDP growth (I simply cannot find the 5.2% figure in the q-o-q break up figures) I don't like what I see, especially on the labour market where the job vacancy ratio is beginning to signal one of those 'does not compute' (i.e. we have no more people!) moments. Finally, we need to consider which one of Eastern Europe's economies that is likely to (potentially) go first, as I noted recently in a comment over at Saxo Bank's Investor blog in the context of whether one or many of the CEE currencies would outperform the Euro in 2008 ...

At this point in time the silence over at the ECB is becoming absolutely deafening.

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