RIGA - Showing no signs of relenting, Latvia's inflationary woes have been thrown into the spotlight as leaders search for both causes and answers to the problem.
In May Latvia reported the highest level of inflation in the European Union for the 10th month in a row, with prices rising by over 6 percent compared with the same month last year. The dubious distinction has voters in a rage and politicians in a fluster.
When inflation first became an issue at the beginning of 2004, EU membership was faulted. After accession, it was greedy local businessmen who were gouging the consumer.
But now, with nowhere else to pass the buck, politicians have begun to blame each other. Even the president has stepped in.
President Vaira Vike-Freiberga told Parliament on June 22 that lawmakers weren't doing enough to fight the scourge of inflation. "Why does Latvia have the highest inflation in Europe? How can one explain the fact that inflation in neighboring countries is three or four times lower? Here we cannot possibly blame everything on the EU when Lithuania and Estonia have lower inflation," she asked rhetorically.
Indeed, the consumer price index increases in Estonia and Lithuania have been manageable. Based on April 2005 information, inflation is running at 4.7 percent in Estonia and 3.2 percent in Lithuania. Some Estonian officials have already sounded the warning bells.
But Latvia's situation looks grim, and there is no end in sight. As a rule of thumb, any regulatory, fiscal or monetary attempt to rein in inflation normally takes about six months to be felt, if not more.
Thus, given the lack of concrete action in Latvia in the first half of the year, it is likely that consumers will see more of the same in the second half of 2005.
Economy Minister Krisjanis Karins has proposed lowering the value added tax on food from 18 to 5 percent, but the discussion with Prime Minister Aigars Kalvitis ended in acrimony. Karins claims that the decrease could lower inflation by as much as two percentage points, while the prime minister calls the proposal "populist."
Both ministers come from rival right-wing parties.
Recently, when gas prices rose in Latvia 's and worldwide 'sTransport Minister Ainars Slesers alleged that the market was hexed by price fixing and called for government regulation.
Local economists say the high inflation is connected with the exchange rate. Latvia pegged its currency to the euro only in the beginning of this year, while Estonia and Lithuania did so much earlier. Previously the lat was pegged to a basket of currencies, which contained the U.S. dollar. So when the dollar fell against the euro, the lat fell too. Gradually, the prices of imported goods began to climb.
When Latvia joined the Exchange Rate Mechanism II, the currency differences were built into the system, said Alf Vanags, director of the Baltic International Centre for Economic Policy Studies.
"There is very little that can be done now," he said, adding that the dollar's decline would have been difficult to predict and is not the fault of the Bank of Latvia.
The exchange rate may not be solely responsible for the high inflation. Also at fault is a soaring demand brought on by robust economic growth. Thus, there is a danger that the inflationary numbers could become part of the expected playing field in business and therefore entrenched.
"If inflation goes into wages, then it goes into prices again," said Morten Hansen, a lecturer in economics at the Stockholm School of Economics Riga. So the possibility for long-term inflation is real, he added. And as wages try to keep pace with prices, demand also receives a boost, resulting in a seemingly endless spiral.
"The Bank of Latvia cannot do anything," Hansen said.
He added that, since Latvia is now an EU member and has joined the exchange rate mechanism, only fiscal policy can be used to fight inflation. And that, he noted, is in the realm of government control. The current government, which includes two right-wing parties and two more centrist formations, would have to either cut its own spending 's which it apparently lacks the political will to do 's or raise taxes and interest rates to lower demand.
The Bank of Latvia, together with the Economic and Finance Ministries, are currently working on a strategy to lower inflation in the country. Their plan is expected within one month.
However, if Latvia is unable to control prices, the country could be prevented from adopting the euro, which it would like to accomplish in 2008.
Karins' proposal to lower VAT on food would benefit the poor, since foodstuffs are perhaps the main culprit in the increasingly expensive basket of items that are used to measure inflation. Even then, stemming taxes would likely increase demand somewhat or could even have little effect if there is not enough competition, according to Vanags.
And while some fret over the possible inflation entrenchment after wages are increased, others in government propose raising wages for employees.
Meanwhile, the government appears incapable of controlling its appetite. Interior Minister Eriks Jekabsons recently called for doubling ministerial wages, as well as those of border guards and firefighters, in order to stave off a mass exodus of personnel for higher paying positions in the private sector.
"The sums are quite large, considering the state budget, but if we won't do it 's and this is the very minimum 's I, as a prophet, can absolutely guarantee to you that a national security crisis will set in and, possibly, even a national crisis," said the interior minister.