Latvia 2026: inflation without overheating

What the data actually say

Recent assessments by OECD, an economist of the Bank of Latvia, and Latvijas Banka’s December macroeconomic forecast point to the same conclusion: Latvia is entering 2026 with moderate growth but persistently elevated inflation driven by domestic factors.

This is not a temporary price shock, nor an externally imported inflation. It is structural and internally generated.

1. Inflation outlook for 2026

Expected inflation in 2026: around 3–3.5%

Latvijas Banka forecast: 3.2%

OECD: core inflation remains high in 2026

Bank of Latvia economist analysis: domestic price pressures remain strong, especially in food and services

Inflation will stay above the ECB target and is unlikely to return to 2% without structural adjustments.

2. What kind of inflation is this?

This is domestic, structural inflation, not energy- or import-driven.

Key characteristics:

headline inflation moderates,

core inflation stays elevated,

price pressures originate inside the economy.

Food and services play a disproportionate role because they directly shape inflation expectations and wage demands.

3. Main inflation drivers

Wage growth under near-full employment

Latvia’s labour market is operating close to its natural unemployment rate. Labour shortages persist across skilled and manual occupations. Wages continue to rise at around 7–8% annually, faster than productivity.

Crucially, the initial wage impulse comes from:

the public sector,

defence-related spending,

education and healthcare,

large state-financed projects such as Rail Baltica.

Private businesses are then forced to follow to retain staff.

Services and food prices

According to analysis by a Bank of Latvia economist, food prices in Latvia diverge from global trends. In several categories prices remain high despite falling world prices.

Services transmit wage increases directly into prices, making inflation persistent rather than cyclical.

Elevated margins and limited competition

During 2023–2024, large producers and retailers recorded profit margins above long-term averages. This provided financial buffers that allowed wages and prices to remain elevated even during weak economic growth.

Administrative and fiscal factors

Regulated tariffs, excise increases and fiscal decisions add further upward pressure, reinforcing the underlying trend rather than creating it.

4. Economic development outlook for 2026

Growth

Economic growth is expected to remain moderate:

OECD: around 2%

Latvijas Banka: ~2.8%

This reflects recovery rather than acceleration.

Growth drivers

Growth is mainly supported by:

public investment,

EU funds,

defence spending,

private consumption boosted by rising incomes.

This is domestically driven growth, not export-led.

Exports

Export prospects remain uncertain. While Latvijas Banka expects gradual improvement, OECD highlights risks related to trade barriers and weak external demand.

Exports are not the primary growth engine for 2026.

Labour market

Labour shortages persist. Large infrastructure and defence projects increase demand for workers but do not create new labour supply. This intensifies wage competition without improving external competitiveness.

Fiscal framework

Fiscal policy remains supportive:

budget deficit above 3% of GDP,

public debt rising toward 50% of GDP,

defence spending financed increasingly through borrowing.

Fiscal space is narrowing.

Bottom line

Latvia enters 2026 with:

inflation around 3–3.5%,

inflation driven by wages, services and food prices,

growth supported by public spending rather than exports,

a tight labour market with no internal reserves,

persistent pressure on prices without corresponding productivity gains.

This is not overheating, but it is a form of growth constrained by structural limits rather than cyclical weakness.

Sources: OECD Economic Outlook; analysis by an economist of the Bank of Latvia; Latvijas Banka macroeconomic forecasts (December 2025).

Image: photos/photo_126@19-12-2025_20-28-49.jpg