RIGA, Latvia (AP) – Consumer prices in Latvia dropped for a second consecutive month in December, official figures showed Monday, sparking concerns about deflation, which experts warn would exacerbate the ailing economy’s woes.
Prices fell 0.5 percent from November and were 10.5 percent higher than a year ago, the statistics agency said.
Though Latvia still has the highest inflation in the 27-member European Union, the annual rate is well below the peak of 17.9 percent in May and is expected to continue falling throughout 2009.
While Latvian households will welcome the news that goods have cheapened, experts warn of the threat of deflation – falling prices – over the longer term.
Economists generally agree that in a deflationary environment consumers tend to postpone purchases and wait for better prices, thus preventing a turnaround in business and consumer confidence.
Some economists say that as Latvia’s economy – now the worst performer in the EU – continues to slide, deflation is the greatest risk and could prolong the country’s troubles.
Latvia’s economy has undergone a drastic reverse in fortunes. For years it was the fastest growing economy in the EU, with GDP growth reaching 12.2 percent in 2006.
This year GDP is expected to contract 5 percent and another 3 percent in 2010, according to the government’s forecast.
That has forced the center-right government to turn to emergency lenders as it struggles to fill a yawning budget gap and meet international obligations. In December the government procured euro7.5 billion worth of loan commitments from lenders such as the International Monetary Fund, the EU and Scandinavian governments.