RIGA - A year ago, few could have suspected that Latvia's consumer price index, which was sailing along at a crisp 8 's 9 percent zone, would suddenly depart on a cosmic trajectory and reach highs not seen in over a decade.
Yet the unthinkable happened. Annual inflation in the Baltics' most troubled economy reached 17.5 percent in April, fueled by a new set of higher electricity tariffs that in turn propelled housing costs, which for the month increased a staggering 6.5 percent.
It was the 11th monthly rise in the annual indicator and the highest level since August 1996, according to the state's statistics agency.
Prices for goods soared 17.6 percent over the past 12 months, while those for services were up 17.3 percent.
On average electricity prices skyrocketed 39.2 percent for the month, the statistics agency announced.
The news hit after an equally devastating announcement that the nation's economy is on the wane. On May 9 the statistics agency said that, based on preliminary results, Latvia's GDP growth for the first quarter was a paltry 3.6 percent compared to the same period a year ago, which is significantly lower than analysts' forecasts.
By comparison, quarterly GDP growth was 8 percent in the last three months of 2007 and 11.2 percent in the first quarter of 2007. For the entire year the economy grew 10.5 percent, the highest in the 27-member European Union.
Given the new data, it would appear that Latvia is nose-diving toward a hard-landing, regardless what ministerial and central bank officials say.
"It looks like the even more pessimistic IMF scenario of a massive slowdown in the Latvian economy in the next couple of years is quite reasonable," wrote Danske Bank in a research note.
The IMF has issued the direst forecast on Latvia's economic health to date, predicting that GDP growth would amount to 3.6 percent this year and 0.5 percent in 2009.
The Bank of Latvia and Economy Ministry, by contrast, have pegged this year's growth at 5.5 's 6 percent. If first quarter results are any indicator, it would appear that the international financial institution is on track to win the debate.
Higher consumer prices are pinching consumers like never before, forcing Latvians to spend more of their income on basic necessities such as food and housing. In comparison to 2007, when salaries increased an average 32 percent, this year wage gains will be much less, analysts said.
Retail sales are down. The statistics office announced that sales in the first quarter dipped 1.1 percent year-on-year, while March sales were down 3.4 percent compared to the same month last year.
Thus with consumer confidence and sales falling, and prices rising, the threat of stagflation has become all too real.
"The market is cooling down very quickly…At the same time, inflation does not show any considerable signs of decreasing. The surge of inflation will weaken people's purchasing power and will significantly affect the slowdown of economic growth," Anssi Rantala, an analyst at Nordea Markets, said.
Olga Ertuganova, an analyst at Latvijas Krajbanka, warned that there will still be a secondary, rollover effect from April's electricity hike.
"Undeniably, people's purchasing power will decrease. To compensate for inflation, wages should grow this year by at least 10-15 percent," she said.
"Unfortunately, the worsening of the economic situation…suggests that for most companies such a wage increase is impossible this year," Ertuganova said.
The burning questions are when the inexorable inflationary rise will finally reverse course and where the consumer price index will end the calendar year.
"The current development of inflation allows sticking to the existing prognosis that the peak of inflation will be reached in the next two to three months and then it has to start declining," said Dainis Gaspuitis, an economist at SEB Banka.
"The fast cooling of the economy will definitely accelerate the process, but excessively rigid price policies can sustain inflation for some time, but then it will suppress consumption and hamper economic growth," he added.
Rantala has predicted that annual inflation would amount to 17 percent this year. By comparison, many government officials had said inflation would end 2008 in single-digit territory.
Economists agreed that the government needed to implement measures to stimulate manufacturing and exports. (See story Page 12.)
