Monday, August 13, 2007

Vanags and Hansen predict more trouble for Latvia

Couple of months ago BICEPS in co-operation with Stockholm School of Economics in Riga published a report on inflation in Latvia. They have brought an interesting yet alarming correlation between Latvian wage growth lagged 15 months and produce price inflation (PPI):

They conclude that as PPI will also carry over to consumer price inflation (CPI), we must expect continous increase in CPI in next year and a half, which is definitely alarming considering the already high inflation in Latvia and the fact that in latest quarter wages rose ca. 33%.
CPI in Baltics (y-o-y):

Wages in Baltics (y-o-y):

These remarks are followed by macro economic theoretical analysis of Latvian inflation and measures taken by the government to cool it. According to my latest information from Latvia the government there has by now decided that they can do pretty much nothing and are just hoping for good luck.
I haven't found any similar research carried out in Estonia, but the situation seems to be very similar but with a 12 month lag. So for the time being the news from statistics departments are becoming more and more interesting reading.

P.S. Morten Hansen was my proffessor in micro and macro economics in SSE Riga and Alfs Vanags evaluated my first attempt of Bachelor thesis giving me 50% (i.e. passing) grade. (i failed the thesis nevertheless).

1 comment:

Edward Hugh said...

Hi Uri,

I just found your blog via the backlink on Claus's Lithuania post.

I also see you are interested in economics. I note Morten Hansen earned the wrath of Latvijas Banca governor lmars Rimsevics for suggesting the peg might have to go.

I am dropping in this comment really to let you know that I have started a Latvia Economy Watch Blog and Claus and I are pooling our Baltic posts on a new blog called, appropriately enough Baltic Economy Watch. I'm afraid it looks as if hard times they may be a comin.

I also noticed this bit:

"I am not sure i agree with E.Hugh's view on the importance of demographics in economic growth, but it is definitely worth while reading."

Well don't worry about this, hardly anyone does. But that doesn't mean I am wrong :).

We are not a club of believers however, so comments are always welcome. And anyway, economics should be a testable science, shouldn't it?

More than rocket science about demography, unfortunately some of the issues which may well arise in Latvia and estonia are already well tried and tested text book situations with non-local denominated currency loans and currency pegs which are under strain as inflation mounts.

Anyway, I am in touch with the English language Latvian bloggers - Latvian Abroad, All About Latvia, FotoLat etc - so I would welcome any insight you could offer from Estonia as the situation develops.

Mail me if you want.

All the best,