Inflation in Latvia storms ahead to 13.2 percent

  • 2007-11-14
  • By TBT staff
RIGA - Consumer prices continued their inexorable ascent in October, reaching an annual 13.2 percent and reigniting fears about the short- and mid-term health of Latvia's economy. Central bankers and analysts responded by warning that the worse is yet to come, and that inflation would likely peak in the beginning of next year.
October inflation hit a staggering 2.2 percent, fueled by rising prices for food and communal services such as heat. Dairy prices were particularly volatile, soaring 8 percent over the month, the Latvian statistics agency reported on Nov. 8.

Overall, prices for goods were up 2.5 percent in October and those for services 1.4 percent compared with September.
It was the fifth straight month that the annual inflation rate increased. 
Government ministers, who will resign on Dec. 5 in accordance to the Nov. 7 announcement by Prime Minister Aigars Kalvitis, said the indicator was more evidence that spending had to be tightened and a budget surplus achieved this year.

"[The inflation result] is a very serious signal, and it makes us consider much stricter austerity measures," Kalvitis told journalists Nov. 8.
He said that "not a single million lats" could be spared from the budget and at least a 1 percent GDP surplus 's possibly even higher 's should be reached.
Finance Minister Oskars Spurdzins said that Latvia was developing "very fast, even too fast," but that the state shouldn't halt economic development.
He said it was necessary to consider how to compensate the low-income population for the price hikes.
Western analysts were dire in their outlook for all the Baltic economies, particularly Latvia. "The massive rise in inflation we have seen over the last few months is clearly contributing to undermining public confidence in the Baltic economies, and there is no doubt that inflation… makes the fixed exchange rate regimes increasingly fragile," wrote Danske Bank in a research note.

The Economy Ministry said October inflation was driven by a jump in food prices, which increased 3.5 percent over the month (compared with October 2006, when food rose by 1.2 percent). What's more, housing maintenance costs 's primarily heating and utility bills 's increased by 5.2 percent, which is a much steeper rise than the 0.6 percent a year ago.
Looking ahead, the Bank of Latvia's spokesman, Martins Gravitis, said that maximum inflation would likely be seen early next year due to an increase in prices for energy resources, regulated rents and public transport fares.

Private sector analysts concurred with the bank. Zigurds Vaikulis of Parex Asset Management said that the October inflation figure was not a surprise, though food prices climbed faster than expected.
According to Vaikulis' estimates, in January inflation can reach 2 percent and the 12-month rate thus may hit 14 percent.
"The gas tariff hikes that will come later and the subsequent price hikes unfortunately do not provide much hope that inflation might ease significantly in 2008. Even if the economy cools down and the inflationary pressure of domestic consumption drops, next year's average inflation, too, will probably be at the same 10 percent," Vaikulis said.

Dainis Stikuts, a senior economist of Hansabanka said that inflation would reach its peak at the beginning of next year due to the hikes of gas, electricity and public transport costs.
"Later, inflation might stabilize. Unfortunately, it will not decrease much, at least until the summer. Inflation rates will start to drop with a slowdown in lending growth and pay increases," Stikuts said.
According to the Economy Ministry, in the 10 months of 2007 prices have surged 11.7 percent, which is a nearly two times faster growth as in the respective period last year.