Last year, Latvia saw the growth rate of prices exceeding the peaks recorded during the global financial crisis. However, Bank of Latvia considers the current scenario a much stronger position having joined the euro area, having a balanced lending market, and a high demand for employees. But the clock is ticking, and the time for action is gold.

In December, the level of consumer prices increased by 20.8% year-on-year, while the average inflation rate stood at 17.3% in 2022. Although Latvia’s inflation in December was the highest in the euro area, BOL analysts suggest that it follows a downward trend. Price volatility in several months of this year is forecasted. However, the overall increase in consumer prices will supposedly be considerably lower than last year.

In Europe, the likelihood of monetary conditions being disinflationary is less than in the US, given the ECB’s delay in raising rates from still-negative levels last year amidst a second big fiscal expansion. This expansion was ostensibly to subsidize personal incomes otherwise squeezed by the terms of trade losses inflicted by the war in Ukraine.

Even so, the euro’s cumulative loss of purchasing power through the pandemic and war will presumably be of a higher order than the dollar. The tightening of monetary conditions in Europe came later than in the US, and it may well not be as tough. The scope for the eurozone to divorce monetary policy from ailing public finances given the block fragmentation risks is limited.

Moreover, the present escalation of the Russia-NATO conflagration is a source of rational concern for the euro’s future purchasing power. Euro-pessimists are troubled by the escalation. One of their concerns is that the mounting cost of rebuilding Ukraine is already estimated at nearly $350 billion. The US and its NATO allies will encounter great domestic political difficulties joining this effort.