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Inflation in latvia
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 occurring inflation.


The inflation caused many different actions to occure. To the pure state of wages and prices it has: "...accelerating 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 early 2007).” (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.

Government reaction:

The Latvian government had many reactions to the inflation one of which was 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.

Category: IB2 Economics | Views: 321 | Added by: MichaelZ | Rating: 0.0/0
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