Page 37 - CE Outlook Regions 2022

The Latvian labour market is recovering strongly, as unemployment is
declining even after the expiry of the furlough benefits provided by the
government, and wage growth remains steady.
Latvia's unemployment rate eased to 7.2% in the third quarter of 2021
from 7.9% in the previous quarter, and will be edging down in 2022.

2.4.2 External environment

Latvia's external accounts remain broadly stable, reinforcing a trend of
growing external resilience. The country has maintained external
competitiveness despite increasing labour costs, and ongoing
deleveraging in the private sector has reduced external imbalances.

2.4.3 Inflation and monetary policy
The global economic recovery and the rebound in demand as well as
the supply side constraints associated with the pandemic are reflected
in a temporary rise in consumer price inflation following a brief period of
deflation.

The central bank has revised Latvia's inflation forecast upwards to 2.8%
in 2021 and to 4.0% in 2022 from 2.0% and 2.9% in the 2021 summer
forecast respectively. Inflation is expected to peak around the turn of
the year, when the annual consumer price increase could rise above
5%.
Central banks, including Latvijas Banka, view the rise in inflation
caused by the growing demand and supply bottlenecks as transitory.
Over the most recent months, the European Central Bank and Latvijas
Banka have continued with highly accommodative monetary policies,
maintaining very favourable financing conditions for businesses,
households and the public sector.

The upward inflationary pressures are largely stemming from the rising
energy prices and their direct effect on the prices of fuel, heating, gas
and electricity, which were all raised over the second half of 2021 as
announced in the summer.

Despite the rapidly growing commodity prices, consumer price inflation
is rising at a much slower rate. Commodities are just one of the cost
components of finished goods and there is a several months lag in the
follow-through of their prices to inflation, which is also not necessarily
always a full one.

The price developments in services are overall moderate, yet further
acceleration is likely on account of both the pent-up demand and cost
factors.

37 CE Outlook 2022 www.intellinews.com