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Tuesday, April 8, 2008

Latvia Inflation March 2008

Latvia's consumer prices rose again in March, hitting an annual rate of 16.8 percent due in part to the increasing cost of services, according to data today from the statistics office. This was the 10th month in a row that the rate of annual price increase hasrisen in Latvia, keeping it at the top of the European Union inflation Leahue. Month-on-month, prices in March in rose 1.5 percent.

Food prices continued to increase, soaring by 20.8 percent from March 2007. Housing costs were up by 25 percent, while alcohol and tobacco are 45 percent more expensive than a year ago.

A comparative view of Baltic inflation is also quite revealing. As can be seen in the chart below, Latvian inflation is head and shoulders out in front, though this is one competition noone is very happy to be winning.


jekabs said...

From what I understand of the Supply Side thinking, encouraging Aggregate Supply can increase output AND lower prices. I just read Prime Minister Godmanis' interview about our economy for the coming year, and he didn't talk much about supply side thinking. I think that lower tax rates, increased competition (maybe even opening up the labor market similar to Ireland) and reduced import/export barriers might help the economy both in the short run and in the long run.

Edward Hugh said...

Hi again,

"From what I understand of the Supply Side thinking,"

Well basically I am using a rather different framework - since I take demography as central - but yes. I mean basically ou have all the inflation since you hit capacity constraints - labour - and this is a supply side issue.

Basically an economy has two central ingredients - labour and capital - and you need these in some sort of appropriate mixture. Basically an economy is simply a huge cement mixer.

Now that the consumer boom is fading Latvia will become - and in particular as the population ages - an export dependent economy.

Latvia has been getting the capital, but by and large this has been channeled off into a consumer boom. This is now over, so certainly you need some important changes in public policy to attract capital for export oriented industries. But you also need the labour. Longer term that means fixing your fertility problem - Latvia will never be stable as a country with such low fertility - but in the short term you need migrants to come and work in Latvia to compensate for the missing births you have had over the last 20 years.

Essentially all the CEE countries are in the same boat here - Ukraine is one of the worst cases, and Russia itself needs overa million migrants a year. So you need to look beyond local countries - remember Latvian wages are below Irish ones and are likely to remain so for some time to come. The Czechs are very active at the moment recruiting in Vietnam and Mongolia, and the Baltic countries need to be just as imaginative.

At the same time, since the slowdown is so dramatic in Latvia you need - as we have been discussing - to also practice some short term demand management to try to counterbalance the blow.