The elevated inflation continues to be the key obstacle to free-market allocation and real wage growth, and the rate of price hikes is predicted to remain high in the near future. In terms of pure economic theory, income (in a particular time period) can be defined as the amount of consumption one can enjoy in the time period, without impairing the ability to generate future income. As capital is defined as the present value of consumption that will accrue in all future time periods, it can be said that income (in a certain time period) is the maximum amount of consumption one can enjoy, without reducing the market value of capital from the starting period to the next.

The purchasing power of Latvia’s population continues on a downward trend. Data for the second quarter of 2022 published by the Bank of Latvia suggest that the average remuneration has risen by 8.3% year on year. In the current context of high inflation, such a rate of wage growth is also insufficient to offset the price surge. Prices, particularly those of energy and food, continued to rise briskly; as a result, the second quarter of this year saw inflation reach 16.4%, thus substantially reducing the population’s real wages.

As consumer prices have accelerated out of control over the past year, a new political narrative on inflation has emerged, one that alleges corporate impropriety as the primary catalyst. The prevailing evidence that peddlers of the corporate greed narrative have repeatedly cited is the reality that corporate profits are at historic highs. This is, in fact, true. But it is not indicative of any measurably intensified greed. The answer lies in a distinction that the corporate greed crowd will never make: the distinction between corporations and businesses. In fact, just a minimal percent of businesses are corporations. While the CPI measures the general prices that businesses are charging, corporate profits figures only measure the profits of large corporations. Yet it is chiefly small businesses that cannot afford significant increases in the cost of doing business because they have fewer resources than their larger corporate counterparts. Thus, it is highly probable that small businesses are primarily driving broad price increases, as a result of an increase in their own cost of doing business.

And if the current inflation growth persists, the purchasing power will keep declining, mostly affecting the less-paid population groups. While labor shortages are encouraging employers to offer more generous remuneration. Deflation of prices can instead be achieved by keeping the quantity of money constant and leaving individual producers free to increase their productivity. Productivity increases come naturally when savers, investors, producers, and customers act freely.

The supply-chain disruption inherited by lockdown measures and the increase in energy prices dictates the rise in production costs that triggers trade-offs on other expenses, including wages. Yet, the situation varies greatly across sectors. For example, the sectors of agriculture, forestry, fishery, arts, entertainment, recreation, as well as transport and storage experienced wage growth of 15.1%, 12.6%, and 12.3 respectively. Meanwhile, the sectors of finance, insurance, other services, and health care saw the lowest wage rise: 6.0%, 5.0%, and 3.2% respectively. Wages in the entertainment and recreation sector picked up after the pandemic, as previously several restrictions were in place and the sector was actually “on ice”. One of the lowest wage rises in the health care sector can be explained by the fact that in the respective quarter of the last year the people employed in the above sector worked extra hours and received premiums for that. This year offers fewer opportunities to work overtime, thus having an adverse effect on the average wage growth.

It seems there is no easy way out. No matter what the ECB does, the EU economy will still have to deal with the malinvestments and bubbles that have sprung up on the back of easy money over the past decade. And which accelerated in 2020 and 2021. The only fix may come by altogether stopping using open market operations to manipulate market interest rates and letting the market set prices. So how does inflation end here? With pain, in the form of a necessary corrective recession or depression.