Latvian 12-month inflation stokes fears of economic downturn

(RIGA) - The Baltic state of Latvia, where rampant inflation is stoking fears of an economic downturn and has forced a delay in adoption of the euro, announced a new jump in consumer prices Monday.

Consumer prices in Latvia rose 0.9 percent in June from May, sparking an increase in 12-month inflation in the European Union newcomer to 8.8 percent, the national statistics bureau said.

In May, 12-month inflation was running at 8.2 percent, down slightly from 8.9 percent in April and 8.5 percent in March.

"Consumer prices have risen more than we expected," Andris Vilks, head economist at SEB Latvijas Unibanka, told AFP.

Latvia is struggling to keep inflation under control as its economy is growing at breakneck pace while it catches up with older members of the EU, which it joined in 2004.

The Latvian economy grew by 11.9 percent last year, the fastest rate since independence from the Soviet Union in 1991 and the strongest growth rate in the then 25-member EU.

Gross domestic product increased by 10.7 percent in the first quarter of 2007, according to Latvia's statistics bureau.

Food prices have risen with "disturbing" speed in recent months, said Vilks, noting that producers blame increasing labour costs.

"But at a certain point this will cause problems because it is not normal that in the space of just a few years we are approaching the price level of western Europe, given our incomes," he said.

Latvia's annual average inflation -- a different measure from the rolling 12-month rate -- was 6.5 percent in 2006.

"Our prognosis for the annual rate of inflation for 2007 is 7.5-8.5 percent, although it will come closer to the higher mark," Lija Strasuna, an economist at Hansabanka, told AFP.

There are increasing fears that Latvia's economy is heading for a "hard landing."

To ward off a potential crisis, the government in March unveiled a plan to slash inflation, largely by tamping down consumption through measures including restricting the issuance of personal loans and mortgages.

Strasuna said the impact of the anti-inflation plan "will only be felt next year."

Surging inflation put paid to Latvia's plans to switch to the euro in 2008.

Keeping price rises under control is a key plank of EU-set criteria for would-be eurozone members.

Latvian authorities have said the country may now not be ready to adopt the European single currency until 2012, and possibly even as late as 2013.