Consumer prices soared in September throughout the Baltic region, surpassing analysts' expectations and sparking new fears of macroeconomic imbalances that could eventually lead to hard times. In Latvia, the Baltic's inflationary champion, consumer prices rose 11.4 percent annually as of September, the highest level in 10 years. Inflation for the month reached 10.9 percent, the highest since January 1997, the statistics agency said. In Estonia, annual inflation reached 7.2 percent, significantly beyond the estimates of some 6.3 - 6.5 percent and leading some analysts to believe that 8 percent was a real possibility for the entire calendar year. Finally, in Lithuania, where inflation has been relatively tame in recent years, the consumer price index catapulted to 7.1 percent based on September data.
In Estonia, annual inflation reached 7.2 percent, significantly beyond the estimates of some 6.3 - 6.5 percent and leading some analysts to believe that 8 percent was a real possibility for the entire calendar year.
Finally, in Lithuania, where inflation has been relatively tame in recent years, the consumer price index catapulted to 7.1 percent based on September data.
I am puzzled by the monthly 10.9% (?!) inflation in Latvia. The Lithuanian inflation for the month of September was 1.4%.
But the relation between wages and inflations seems to be too straight to be true - just when the wages started to raise, inflation kicks in. It may look that the Baltic states are more ruthless to regular folks than Bernanke's rate cuts. What does the asset inflation then mean? Does it accumulate wide inflation in the future, or does not play a role at all?
If that happened (as if...) wage rises would count as growth - more spending, on more goods and services, and possibly more small scale investment too.
Of course what's happened is that the capital and physical economies have decoupled more and more, so it's possible for ROI to circulate indefinitely between different schemes, becoming bigger and bigger and never actually being spent on anything tangible.
The mythology calls this growth and seems to consider it a good thing.
I think it's inflationary because at best its leeching value out of the physical economy, and at worst it's just a big Ponzi-shaped pile of IOUs.
You can of course still cash ou, but only if you do it before the pile collapses - which is useful for anyone who gets there ahead of the rush, but not so useful for the Bigger Fools who are a little slow.
None of this has anything to do with actually producing something.
But more generally: if inflation is caused by greater capacity and willingness of regular folks to spend more, there should be some time lag before all elasticities work out new price distributions "forced" by greater spending power of consumers. Yet, why does inflation kicks in so suddenly? Even more, if consumers get greater spending power, they won't necessarily increase demand of the basic basket of goods - in the modern world, extra income is massively put into "investments". I don't make a sense of why consumer demand should raise so dramatically when wages rise, but not dramatically at all when they are burning their loans.
But I see the following simple explanation. When entrepreneurs are "forced" to raise wages, they still want to protect the same profits. They might even wish to keep their monetary share from the business bounty, tending to leave employers with still marginal share. The same profit level (or relative share) could be possibly kept by raising prices! It's elementary observation: consumers do not set prices in the modern market, the enterprising side sets prices. A consumer has only the power to buy or not to buy a product for a new price. Whatever elasticities are, inflation statistics do not even register new consumer demand - they register only raising prices.
So apparently, the mechanics of greater wages on inflation is that entrepreneurs tend to seek the same profit (or relative share) even when they have to raise wages. This inclination is especially strong after a long period of cheap worker force. In the textbook economics, consumers would punish enterprisers that raise prices out of proportion to marginal demand. But in the real world, they do not have much choice in limited time. The whole elasticity theory flies out of the window at times of strong inflation. The basic inflation psychology is not that consumers have urgency to spend more, but that entrepreneurs cannot "afford" to keep the same prices.
