Inflation Increase in Latvia: A Short-Term Phenomenon or a Risk Associated with Demand Pressure? Christoph B. Rosenberg Senior Regional Representative.

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Presentation transcript:

Inflation Increase in Latvia: A Short-Term Phenomenon or a Risk Associated with Demand Pressure? Christoph B. Rosenberg Senior Regional Representative International Monetary Fund Warsaw Regional Office

Latvia's Inflation in Perspective * Baltics and EU8 exclude Latvia. Source: Eurostat.

The SDR Peg and Inflation (a)

The SDR Peg and Inflation (b) Notes: NEER weights assume that imports from EU are priced in Euro, non-EU imports priced in dollars. Contributions to HICP estimated using weights based on imports to GDP ratios in each country. * Jul-Dec Source: Eurostat.

Supply-Side Effects Source: National authorities.

Catch-Up to EU Price Levels (a) Relative price level vs. relative GDP per capita (PPP), Source: Eurostat.

Catch-Up to EU Price Levels (b) Source: Eurostat.

Structural Factors

Domestic Demand Pressures Source: Eurostat.

Simulation: The Effect of Domestic Credit Growth

Second-Round Effects – Inflation Expectations

Second-Round Effects – Wage Setting

Source: CSO.

Conclusions Short-term supply factors and the catch-up to EU levels may play a role in relatively high inflation, as they do in other Baltic countries. Short-term supply factors and the catch-up to EU levels may play a role in relatively high inflation, as they do in other Baltic countries. Demand pressures – compounded by structural factors – contribute to inflation inertia in Latvia. Demand pressures – compounded by structural factors – contribute to inflation inertia in Latvia. Even if inflation is driven by short-term supply factors, there is a danger of second-round effects as evidenced by recent wage hikes. Even if inflation is driven by short-term supply factors, there is a danger of second-round effects as evidenced by recent wage hikes.

Possible Policy Responses Slow the growth of domestic demand, mainly by cautious fiscal policy (save revenue overperformance and keep expenditure/GDP constant). Slow the growth of domestic demand, mainly by cautious fiscal policy (save revenue overperformance and keep expenditure/GDP constant). Keep wage growth in check to avoid a wage- price spiral. Keep wage growth in check to avoid a wage- price spiral. Improve competition, including at the retail level. Improve competition, including at the retail level.