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Tuesday, January 15, 2008

Latvia Inflation December 2007

Latvian inflation accelerated in December to the fastest pace in more than 11 years as household expenses and service prices in restaurants advanced, adding to concern the overheating in the economy is far from being under control. Latvia's inflation rate, which is the highest in the European Union, rose to 14.1 percent from 13.7 percent in November, the Statistical Office said yesterday. There was one small glimmer of hope though, since consumer prices only rose a monthly 0.7 percent, compared with 1.4 percent in November. So the monthly rate may be slowing. We need to wait a bit and see.

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. while services such as restaurants rose at an annual 21 percent rate.

This inflation rate, which is now the fastest since November 1996, is four times the rate of the average price growth in the 15 nations that share the euro, meaning that we are now a long, long way for the target zone where prospects might open to switch to the common currency. Indeed while noone really knows clearly what is going to happen next in the Baltics, Bulgaria, Hungary and Romania, one thing I think is clear, and that is that after the event we will need a post-mortum about how we all got to where we are. Was it in fact wise, for example, to make the issue of euro membership obligatory for all the new member states on joining the EU, and thus raising so many expectations (and as it were, stoking the fire). Certainly in the Czech Republic they are already begining to draw some conclusions along these lines as I explain in this post here.

This rate of consumer-price growth even as domestic demand is slowing also increases the possibilities that the economy may do a sudden "about turn" and start to contract. Unfortunately some kind of a correction is evidently coming, and we are just left watching and waiting.

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