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Cablegate: Latvia: Inflation Ticks Up to 9.5 Percent in July

VZCZCXRO5395
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHRA #0628 2330808
ZNR UUUUU ZZH
R 210808Z AUG 07
FM AMEMBASSY RIGA
TO RUEHC/SECSTATE WASHDC 4286
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS RIGA 000628

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV LG
SUBJECT: LATVIA: INFLATION TICKS UP TO 9.5 PERCENT IN JULY

REF: A) RIGA 166, B) RIGA 497

1. (U) According to Latvia's Central Statistical Bureau (LCSB),
inflation in July increased 1.2 percent since June, bringing annual
inflation up 9.5 percent year-on-year. Latvia's inflation rate is
again the highest in the EU, according to the EU's Eurostat. LCSB
reported higher prices for tobacco products, services related to
housing, heat energy, and fruit had the biggest effect on inflation
in July.

2. (U) Prime Minister Aigars Kalvitis responded to the latest
numbers by pointing to the government's anti-inflation plan
implemented last May (ref B) and said he wants to give the adopted
measures more time to show results. However, a recent drop in the
Prime Minister's popularity may indicate growing impatience and
frustration among Latvians who have been facing ever rising prices.
Food costs have become especially high, up 12.2 percent since July
2006, according to LCSB, and Kalvitis was booed when he appeared at
a basketball game against Lithuania on August 4, something that no
one can remember happening to a Latvian leader in recent years.

3. (SBU) Kalvitis faces two economic mileposts. One is the
September adoption of the mid-year budget review. While the budget
currently shows a roughly 500 million dollar surplus, there will be
political pressure--especially from public education and health care
sector workers--to spend some of it, despite the inflationary
effect. Our contacts in the bureaucracy, though, say that they are
being pressured to keep spending down. The second is the December
parliamentary vote on the head of the Bank of Latvia. Current
governor Ilmars Rimsevics wants to keep his job, but rumors have
surfaced in the press that the PM may wish to see a less independent
governor. Rimsevics, who has publicly supported the government's
anti-inflation plan but in meetings with the embassy has admitted
that the plan was the bare minimum the government could credibly
propose, is well respected in international financial circles and
his removal would do little to address rating agencies' concerns
about the Latvian economy. President Valdis Zatlers has publicly
supported the re-election of Rimsevics.

4. (SBU) Comment: The economic news is starting to bite politically
and Kalvitis, who has a very laissez faire approach to economic
issues, is going to find himself under increasing political pressure
to counter his own instincts and adopt a more austere position for
the government in the economy. He is likely to continue to delay
the hard choices as long as possible, gambling that people would
prefer inflation to a hard landing. End Comment.

SELDOWITZ

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