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Latvia's inflation rate probably remained highest in the EU

Latvian inflation probably remained the fastest in the European Union in January after the government raised import duties and imposed higher electricity prices, threatening to rule out euro adoption this decade, a survey of economists shows.

Annual consumer-price growth was 6.8% last month, the same pace as December, according to the median estimate of six economists surveyed by Bloomberg. The inflation report will be released by the statistics office in Riga at 1 p.m. today. Inflation in the Baltic state in December was more than three times faster than that of the 13 nations that share the euro. The rate has held above 6% for more than three years, spurred by the strongest economic growth in the EU. Quickening price increases forced the government last year to abandon its 2008 target date to switch currencies. „Everything points in one direction: higher inflation,” said Alf Vanags, director of the Baltic International Centre for Economic Policy Studies in Riga. „Cigarettes, transport, energy are rising and wages are up by more than 20%.” Euro adoption may come in „2012 at the earliest.” Rising consumer prices forced all three Baltic states, former members of the Soviet Union, to alter their euro-adoption timetables. Estonia said yesterday the inflation rate remained at a five-year high of 5.1% in December. Lithuania reports its figure at 11 a.m. on February 14. The euro is open to countries that pass tests for inflation, deficits, debt, long-term interest rates and currency stability. Slovenia is the only new EU member that adopted the euro on January 1. Lithuania was the first country to be rejected for the euro this year because its inflation rate was too high.

Increased prices of electricity and higher customs duties on cigarettes and fuel to bring them closer to the EU kept inflation from slowing in January, said Andris Vilks, chief economist at AS SEB Unibanka in Riga, the country's second-biggest bank. „The situation doesn't look good for the first half,” Vilks said in an interview. „Inflation will likely be close to 7%.” The state-controlled electricity monopoly Latvenergo raised prices 18% on January 1, anticipating higher costs of its basic raw material, natural gas. Gas prices are rising in the Baltic states as OAO Gazprom, Russia's natural-gas export monopoly, increases costs to western European levels. The company will charge Latvia about 40% more for the fuel in May this year than in 2006. The energy effect on Baltic inflation may subside after Gazprom finishes equalizing prices in 2008. The increase in natural gas prices set for May will have „a cumulative impact on inflation of about 1.6 percentage points,” said Zigurds Vaikulis, an economist at Parex Asset Management.

The cost of the fuel, used for heating and generating electricity, may rise another 30% in 2008, Vaikulis said. Latvia's economy, which expanded 11.8% in the Q3, may have grown 11.3% in the last three months of 2006, according to a Bloomberg survey of six economists. The statistics office will release preliminary figures tomorrow. The economy this year has been driven by „unexpectedly high employment growth,” said Lija Strasuna, an economist at AS Hansabanka in Riga, the country's biggest lender. Employment grew an annual 4.8% in the first nine months of 2006, compared with 1.5% for the whole of 2005, she said. „Labor shortages in the second half of 2007 would cause the economy to slow,” Strasuna said. Hansabanka estimates GDP growth this year will slow to between 8.5 to 9.5%, she said. (Bloomberg)