RIGA - The economic doomsayers won out in Latvia after the Central Statistics Department announced on Sept. 10 that annual inflation reached double-digit territory, hitting 10.1 percent in August.
The announcement cast a deeper shadow of doubt over the government's ability to combat the highest inflation in the European Union and justified a small circle of realists who had predicted at the beginning of summer that inflation in Latvia could reach 10 percent.
Concurrently, it was announced that Latvia's trade deficit has widened by more than 25 percent over the month of July to 389 million lats (555 million euros). In June the deficit was 308 million.
The sharp rise in imports 's up 10 percent to 717 million lats 's and the drop in exports 's down 3.5 percent to 328 million lats 's indicates that Latvians continued to snap up imported goods in July despite the start of the government's anti-inflation program.
Latvia has consistently had the highest current account deficit in the European Union for several quarters in a row, a trend that economists say could put pressure on the stability of the national currency, which is pegged to the euro. As prices and wages continue to increase in Latvia, exporters will find it increasingly challenging to compete on international markets, which will result in calls for a controlled devaluation of the currency to make Latvian products more competitive abroad.
Danske Bank, one of the most critical voices in the international community on Latvia's economic policy, said in a statement on Sept. 10 that the Baltic state was overheating and risked a hard-landing scenario.
"Overall, Latvia faces a heightened risk of a hard landing in the economy, with a current account deficit almost reaching 20 percent of GDP, an unsustainable credit growth of more than 60 percent year-on-year, and a massive acceleration in wage growth," the bank said.
The bank recommended urgent policy action on the budget, which is one of the few instruments the government has at its disposal to regulate its red-hot economy.
According to the statistics department, August inflation amounted to 0.4 percent and was fed by rising prices for tobacco, catering, meat products and heating. The monthly increase, however, was manageable compared to July, when month-on-month inflation amounted to 1.2 percent.
On an annual basis, price increases for food, alcohol and tobacco, housing and utilities 's most of which are core expenditures of any household 's were extremely high. Food prices alone have increased 12.6 percent from August 2006 to August 2007.
First-quarter data showed that wages and salaries have increased 33 percent year-on-year, indicating the presence of a wage-price spiral in the economy, which is the EU's fastest growing.
Latvia's economy grew 11.1 percent in the first half of the year, the statistics department reported Sept. 7.