Although the combination of factors affecting inflation at the moment and in the coming months has changed considerably with the global prices in the resource markets falling, the Bank of Latvia reports that January does not yet represent a new beginning in the inflation story this time. In fact, inflation in Latvia stood at 21.5%. Will further steps be taken in the direction of interventionism or free market competition?

Global energy prices have so far declined. Oil and gas prices on stock exchanges are even lower than before Russia’s invasion of Ukraine in February 2022. The fall in global food prices is less substantial. Why has this not been reflected in the inflation data yet?

In the current scenario, changes take time. For instance, consumers are to pay for gas at the previously established tariff until April. It is also a matter of the traders’ willingness to revise the prices downwards or to wait a while before making such decisions. Then an appropriate market competition level is necessary to prevent a wide application of such a strategy.

Despite the falling global prices, the average inflation is still high both locally and in the euro area. Therefore, the Governing Council of the ECB continues raising interest rates and making other decisions to ensure a timely return of inflation to its 2% medium-term target. Taking account of the current trends, Latvia will, supposedly, see one-digit inflation already in the second half of this year.

Either central banks use the 2% target to deceive the public into their various anti-market interventions, for public detriment. Or, they use 2% as a planning tool for the supposed public good. Rather than mainstream economists, media, or policymakers asking serious questions about the 2% strategy, the narrative gets continued support.

With reported CPI figures much higher than anyone wishes to see, a Reuters headline reads: “Fed needs a recession to win inflation fight, study shows”. In the last 16 worldwide instances of disinflation engineered by central banks, there was no instance in which a significant central bank-induced disinflation occurred without a recession.

Disinflation refers to the lowering of (price) inflation rates back to the arbitrary 2% target. Curiously, in the article, the central bank is normally cited as the entity that fixes the economy by disinflation. Never cited as the entity that broke the economy by causing inflation.

For instance, the mainstream critique is that the central banks made a mistake by raising rates “too late,” implying that a recession could have been averted if only they had acted sooner. But this misses the bigger picture. The bust (or recession) was set in motion prior to 2021, beginning the moment the policymakers intervened heavily in the market.

Latvia dropped 10 positions between 2021-2022 in the economic performance of the World Competitiveness Ranking.

The fear now is that the central banks and not free market competition will try to fix the problem they created. And by doing what they do best, creating more problems to fix.