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The Latvian currency Latvian Lat has been tied to the currency of the European union (Euro) in the 2004 year. This was mainly a measure to fight the inflation and then as was estimated in the year 2005 to change the Latvian lat to Euro in the year 2008, but current prognosis showed that with our current inflation of 14% we are unable to join until the inflation falls till 3%” which is found accepteable., “Latvia has so far not publicly deviated from its plan to adopt the euro in 2008 but with Latvian inflation the highest in the EU and way above the Maastricht level early euro adoption is increasingly unlikely”. (Vanags and Hansen (2006) . In the recent publication made Eubusiness.com , High inflation means Latvia is unlikely to introduce the single currency euro before 2011, and possibly even as late as 2013, (Finance Minister Oskars Spurdzins).

Fast increase in gas, electricity and gasoline prices, was the reason for the inflation in 2008. Moreover if we analyze the situation, then we can see not very inspiring situation. The main causes for the inflation come from the previous years. At the current moment it is closely connected to the fact that our country has excess of import over the export. There can’t be any free space in the mark with an open market economy so the free place which was taken by the goods produced in the country are now taken by the goods that are imported. This increases the producer’s expenditures in the natural resources, which made the current prices unprofitable for them; hence the price of the goods and services is growing.

Rise in the salaries and wages, stimulated also by social sector, which is under control by the politics. The work unions tried to get the salaries at the level of the European Union, but this resulted only in the short term real money income increase. Since the real level of the salary is

Equation Real Salary

Then the increase in salary with such high inflation such as in Latvia result, in the money flow increase, therefore the government was obliged to print more money to satisfy the needs of people; this resulted in the increased amount of money in the country and decreased buying power of Latvian lat. There is also one very important factor; inflation in Latvia was quite low in the years 1999-2003. But now people are used to the inflation, and trade sectors and service sectors look into the future and wait for prices to get even higher and this result in higher prices in the future. In the same time people are aware of the issue that the prices are going up, therefore they demand for additional wages and salaries. This due to the scarcity results, in the price increase for the goods available on the market for the consumers. This is second-way effect, price increase results in the salaries and wage increase. This is quite dangerous, in view of the fact that this is due to: the process is cyclical, at first prices increase, then wages increase, and the prices increase again. This is domino effect which tends to increase the inflation even higher. However this reason is not the only reason due to which our country experienced such high inflation in the past years. Prices tend to increases in different market sphere, and the main reason for this is, is demand pressure. Local demand in Latvia was very high. GDP rose drastically during the last years, more then 10% a