Stagflation in Latvia: How Long, How Far, How Deep?

What a difference a year makes. Our previous report, from June 2007, focussed on overheating of the Latvian economy and rising inflation. Now, some 14 months later, the Latvian economy has entered recession as measured by two consecutive quarters of seasonally adjusted GDP decline. At the same time the latest inflation rate is down from the peak observed in May of this year. Thus the issues to be discussed in this year’s report are somewhat different. In particular we raise five questions – questions we believe should be at the forefront of the economic-political debate in Latvia: 1) Has inflation indeed spiked? 2) Is disinflation (i.e. the rate of decline in inflation) likely to be fast or slow? 3) Why has the Latvian inflation experience been so much worse than elsewhere e.g. the two other Baltic countries? 4) How deep a recession – permitting the use of that concept – will Latvia experience? 5) How long will it take for the economy to recover?