Inflation in latvia. It's Causes,
Consequences and Government reaction.
First, on must define inflation.
According to the Oxford Dictionary of Economics it is defined as:
A persistent tendency for prices and
money wages to increase. Inflation is measured by the proportional
changes over time in some appropriate price index, commonly a
consumer price index or a GDP deflator...
Inflation in latvia:
One could argue that the latest rapid
increase in inflation was due to Eu accession or on unfavourable
exchange rate as the law is now pegged to the euro, rather it is as
states in an inflation report which was issues may of 2006 which
stated that:: "...
overheated labour, goods and property markets all of which interact
to generate accelerating inflation”.
This can be then linked to the inflationary spiral, which is not only
the cause, but also as explained later a consequence of the already
The inflation caused many different
actions to occure. To the pure state of wages and prices it has:
pace of both wages (32.8% growth in the first quarter of 2007) and
producer prices (which have been rising at between 16% and 18% in
(Alf Vanags, Morten Hansen) This resulted in the wage growth to
produce price increase after a lag of about 15 months. This would
result effected the export prices which in return would decrease the
competitiveness because exporters wouldn't see the benefits of
exporting. Also the increase in producer prices would decrease the
production in latvia and increase the imports. This would then result
in money flowing out of the economy which is never good. Another
aspect is that the increase in inflation would result in the value of
the LAT to decrease. To help this people would have to increase their
wages which would then result in an inflationary spiral.
The Latvian government had many
reactions to the inflation one of which was to: "...to
set up a working group on inflation which eventually published an
anti-inflation plan in early March 2007. The aims of the 2007 report
include: to examine the most recent developments in consumer prices
in Latvia and link them to developments in producer prices and wages
and to make an assessment of the likely future course of inflation in
Latvia; to propose and outline a framework for analysing
macroeconomic policymaking in Latvia; and to examine the likely
impact or effectiveness of the anti-inflation plan.”
(Alf Vanags, Morten Hansen) An anti-inflationary plan is a plan made
to prevent and/or decrease the amount of inflation in a country. In
case of latvia it's main goals was to analyze and understand why
inflation is being increased in both the wages of the people as well
as the producer costs. It would then allow the Latvian Government to
respond correctly with a quicker reaction time. This plan also would
allow the Latvian Government to estimate the effects of the inflation
in latvia, and it's residents.