– that’s what it seems to be to try to explain that Latvia will not experience hyperinflation when joining the Eurozone.
I have tried to argue for that nothing much should happen to prices on an earlier occasion but some news made me want to deal with the subject again.
Here is what I think is a quite typical statement, in this case from Germany’s international broadcaster, Deutsche Welle:
She [a person being interviewed – read the full article here] is convinced that “prices will go up after joining the eurozone and it will be the ordinary people who will suffer again. And nobody can tell me that prices won’t end up increasing,” she worries.
It is one thing that some individuals think so but when it also seems to capture the media I am getting worried.
This is a copy-and-paste from BNS (Baltic News Service) 10 July 2013:
WEALTH TO GROW SLOWER NEXT YEAR. Affected by the euro factors, real wages in Latvia are going to grow at a slower rate next year. The Latvian economy is now seeing what was already expected — after the convergence report confirming Latvia’s readiness to join the eurozone, Latvian consumer prices stopped dropping and started to edge up again. Even though there are neither major external nor domestic factors that might fuel price hikes, deflation was replaced by inflation in June, and although the price increases have not been too steep, concerns have been raised that they are predecessors of much bigger processes.
Whoever wrote this seems to suggest that a) a cunning plan is being executed: Latvia gets accepted to the Eurozone and prices immediately start rising, b) that deflation is somehow a possible norm and c) lo and behold! Much worse will happen! No offense (which we always say when an offensive remark is just around the corner) but a) and c) I find rather typically Latvian: The belief in sinister cabals and doomsday scenarios. b) is more important to me as an economist – it is just poor economics to seem to suggest that deflation could be as normal as inflation. It is not.
By the way – general inflation development in Latvia since 2005 is represented in Figure 1, which shows the increase year on year in the Consumer Price Index, i.e. for all goods and services in Latvia.
Figure 1: Latvian consumer price inflation, 2005 – 2013, monthly data
Source: Central Statistical Bureau
Unfortunately, those who believe in surging inflation will most likely think they are right – but for all the wrong reasons. Inflation will be higher but that is because it is ultra-low right now, at just 0.2%. Some 3% is more normal here, a bit higher on average than in the Eurozone but for reasons explained here.
But I wonder which prices people expect to go up? As we know different goods and services change very differently in terms of their prices. Below are price increases for all main commodity groups since 2005.
Figure 2: Increase in consumer prices since 2005 for goods and services in general (CPI) and for the 12 main commodity groups
Source: Central Statistical Bureau and own calculations
CPI: All goods and services – this means that prices on average have risen 48.8% since the beginning of 2005, this of course including the high inflation times of the overheating period of 2005 – 2007 but also the deflation period of 2009-10. But, as mentioned, with substantial differences among commodity groups. Please notice that a) quite a bit of the increase is due to higher taxes (notably tobacco and utilities (water, electricity, heating)), b) that food prices are up quite a bit partly because of EU membership (hitherto cheap Latvian goods can be sold in the EU at higher prices there – and here. Just think milk), c) but also that some goods put a downward pressure on inflation such as communication due to competition and innovation (just think internet connections).
In fact, rather little has happened to prices in the past three years since the recession bottomed out, see Figure 3.
Figure 3: Increase in consumer prices June 2010 – 2013 for goods and services in general (CPI) and for the 12 main commodity groups
Source: Central Statistical Bureau and own calculations
Overall inflation of just 7% for three years is very subdued and, as can be seen, several commodity groups have displayed deflation. Given this experience, which ones of these groups will see a surge in prices just because prices will be in euros and not in lats? Beats me, but BNS, the woman from the interview and many others seem to know…..
Final comments:
As mentioned, inflation will be higher but that is because it is so unrealistically ultra-low right now. Zero inflation or deflation is just not sustainable.
To the extent there are tax increases in the pipeline, there will be a spillover to prices but this effect will originate in the public sector, not among ‘evil and greedy’ retailers.
Many prices have remained subdued due to weak demand for goods and services. That demand will not change overnight on 1 January 2014.
Morten Hansen is Head of Economics Department at Stockholm School of Economics in Riga
Komentāri (7)
Valdemārs Valdemārs 12.07.2013. 11.43
In the perspective of next few years there is no concern of high inflation indeed. However, I am not that sure about the long run. QE policies of the major central banks pump up the money stock worldwide. Those efforts to “stimulate economy” are largely in vein due to preferences of economic agents to hold cash like bonds instead of following a conventional spending behaviour. Nevertheless, this precautionary behaviour will not last forever. And when the attitude will shift the reversal from the sitting on the pile of cash to the getting rid of it will blast the prices up in a short time span with a narrow room for the central banks to react.
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simpsons 11.07.2013. 23.13
Latvia is country where person who 10 years was directly responsible for the state budget and 8 subsequent years for the audit of the budget can declare that Lats is not money, but nation’s flag and ‘the last remaining freedom’.
Lemberg’s spokeswoman Reizniece-Ozola has heard that just before changeover of Lats to euros, the exchange rate will move by 30%, fuelling rumours of exchange rate at parity. Another member of her party on national TV suggested to base decision on euro on views of one taxi driver in Berlin.
Therefore, it is hardly surprising that a women or an anonymous commentator at BNS have bizarre views on euro.
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@simpsons > simpsons 12.07.2013. 00.56
Many people regard that Lat notes are beautiful. Some also believe that Lats foremost is money. Because euro functions better as money, it’s worth considering adopting euro.
Whatever people’s views, if they express idiotic opinions, they should be called to answer.
For example, if somebody implies that stars in the EU flag have something to do with number of the EU member states, that somebody should be told that he is quite mistaken.
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simpsons > simpsons 12.07.2013. 19.24
– If you new that the number of stars on the flag have nothing to do with the number of the member states, then why did you imply otherwise?
– Language is much more than the communication tool, it is major part of the nation’s culture and adapts to local geographical and historical specifics. To demonstrate it I was going to ask you to translate into English ‘sērsna’, ‘urla’ and ‘Jāņabērni’, but because you love the symbolism so much, here is better example. ‘Latvijas Avīze’ was asking readers for ideas for a monument which would represent Latvia. Amazingly many suggested along the lines ‘Sērdienīte sēž uz laukakmeņa un gauži raud’. English please.
– Money have certain functions (1) be medium of exchange. Majority of Latvia’s foreign trade is in Euros, nothing in Lats. Even within Latvia quite a few transactions are done in euros, e.g. financing. (2) accounting unit – some car dealerships express their prices only in euros, Latio publishes flat prices in €. (3) store of value – end of 2008, beginning of 2009 Latvians changed 2 billion lats for euros. Therefore euro is better money than Lats.
It appears that your only arguments against euro is that euro coins come in different size to Lats and, bizarrely, that you find Milda less of a symbol than the cow and the salmon.
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simpsons > simpsons 13.07.2013. 12.46
Just for recapitulation
– On topic about economics and weak/false argumentation, you linked number of stars on the European flag to number of the member states. The link, which by your own admission does not exist, therefore the argument is false.
– You made fantastic statement that a language is just a communication tool which I rebuffed. Now you are implying that a living language is only commodity and would like to put a price on it. I believe that that communication within your family/friends and recognition of the heritage is priceless. For 99% of Latvians that would not be possible in English.
– On the topic under discussion you introduced argument of different sizes and that the cow and the salmon represent Latvia better than Milda.
Now you are arriving at participation in ESM. Yes, Latvia will have to pay 300 million euros. No, it is not expenditure, it is investment in capital which pays dividends, both economic and political. Arguments against ESM coming from a Latvian is preposterous. Latvia was the first beneficiary of ESM predecessor and still owes it more than 3 billion euro. And why only against ESM? Latvia has subscribed to EBRD capital 30 million, 220 million euro in EIB capital and 142 million SDRs in IMF. Shall we withdrawn from all these too?
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simpsons > simpsons 13.07.2013. 15.14
– I can read what you wrote, but cannot understand why in the discussion about economics you insist on counting stars.
– Glad to hear that your command of English is as of your mother tongue. For 99% of Latvians it is not. By the way, would you mind putting in English ‘sērsna’, ‘urla’, ‘Jāņabērni’?
– You are saying that Latvia can refuse help others, and those others next time will be definitely helping Latvia? Seriously? If you view that the current situation in Latvia is less advantageous than bankruptcy of the state, disappearance of the banking, severe devaluation followed by bankruptcy of all mortgage holders in forex and major inflation, then you will fit well in Nikolajs Kabanovs organisation ‘God save the Lat’.
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simpsons > simpsons 13.07.2013. 20.44
It is you who states that it is easy to replace Latvian with English. I wrote exactly the opposite. Why then I have to prove your bizarre views? Brits are know for speaking speak English already for few centuries, yet are less well-off than Germans.
In 2008/9 no-one was willing to provide any loan to Latvia and local interest rates exceeded 10%. Yes, in those circumstances long term loan at 3% interest and huge amount is a help.
You say that Latvia’s bailout was financed by IMF, not ESM. I wrote ‘ESM predecessor’, which the arrangement of the EC and the member states actually is. IMF allocated 1.7 billion euros, other 5.8 billion were put together by the EC.
Can’t you do even basic search before making obviously false statements?
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