RIGA - Inflation ended the year at an eye-popping 14.1 percent in Latvia, which for the second year in a row is set to win the honor of having the European Union's fastest-growing economy and highest inflation.
Data from the nation's statistics office show that prices for goods increased 13.2 percent while those for services 16.4 percent over the year. Housing services and foodstuffs were ahead of the pack, soaring 20.9 percent and 19.9 percent respectively, according to the statistics agency.
The growth of several core food items was nothing less than staggering. For instance, bread prices skyrocketed 38 percent, while cheese was on average 42.9 percent more expensive in December 2007 than it had been a year earlier. They are poised to continue climbing this year as well (see story on Page 6.)
Average annual inflation was 10.1 percent, the statistics office announced.
While no one was surprised by the announcement, the result was nevertheless shocking when juxtaposed with the annual forecast of 6.5 percent that the Economy Ministry had originally issued at the end of 2006. In October alone prices grew a phenomenal 2.2 percent.
Global trends such as higher energy and food prices played a large role in ratcheting up prices, but Latvia's non-surplus budgets and exuberant bank landing fed consumption and as a result further catalyzed the dizzying price rises. Wage growth has also compounded the problem as the Baltic state struggles with a significant labor deficit.
Moreover, the worst is yet to come. Analysts in both the private and public sector agree that the annual rate of inflation will continue to grow over the next few months, with the first signs of a reversal to materialize only in the second half of the year.
No one can say how high inflation will go. Predicting inflation has become taboo in Latvia, since so many analysts have been so wrong over the past year. Still, consumer prices could increase as much as 17 - 18 percent given the incremental 0.5 - 1.0 percent monthly gains since April, when inflation last declined.
Last year's inflation in Estonia and Lithuania amounted to 9.6 percent and 8.2 percent, respectively.
In Latvia, several analysts have predicted that 2008 inflation could come in around 10 percent, a forecast that nevertheless appears to be rosy given the numerous hikes in administrated prices that are set to kick in.
The government, for its part, is preparing citizenry for "hard times."
"The government and all Latvian residents need to understand that the time of robust economic growth is in the past, and there are no longer good days lying ahead," said Finance Minister Atis Slakteris.
He said the government had adopted an anti-inflationary plan, but that without the support of every resident these efforts would not yield the intended results.
"Each and all have to plan their expenditures frugally. We have to reckon with difficult times starting this year," the minister said.
The government indeed adopted an anti-inflation program last March, but many of its key components were not passed by Parliament until the summer. Still, thanks to the measures lending growth has fallen sharply and big-ticket purchases, such as new cars, have decreased dramatically.
But the pressure of prices will be sustained in the near term by food, energy, and transportation. In Riga the price of public transportation increased 33 percent in January. Food prices are likely to continue climbing, especially given the higher prices for gasoline and energy inputs.
The main factor will be those prices regulated by the state 's i.e., for gas, heat and electricity. All these are set to rise given the new demands by Russia's Gazprom, though by how much remains to be seen.
Some experts, such as Bank of Latvia President Ilmars Rimsevics, have called for a freeze on these administrated prices until inflation cools to a manageable level.
