Inflation is the top economic story in Latvian news these days. (Large current account deficits are harder to explain to general public.) The year-on-year inflation just topped 10% and, in a call-in poll of "Kas notiek Latvijā?" TV show, 97% answered that think the government should resign. (Call-in polls are not scientific and "Kas notiek Latvijā?" audience may skew significantly more to pro-opposition side than general Latvian population. Nevertheless, that sentiment is widespread, even if it's not 97% in general population.)
Inflation has been rising in both of other Baltic countries, but significantly less. It's now 5.5% in Lithuania and 6.4% in Estonia. Why Latvia?
There are a few factors that get mentioned all the time and one that gets overlooked. The currencies of the three countries had their exchange rate to Euro fixed at different times. Estonia fixed the exchange rate to German mark which became Euro. Latvia had a peg to a currency basket and switched to Euro peg in December 2004, in preparation for the switch to Euro (which is indefinitely postponed now). Lithuania fixed the rate to dollar and then switched to Euro in early 2002.
Latvia happened to switch at the time when Euro was very high compared to other currencies. Lithuania switched when Euro was around its lowest point ever.
It made quite a difference. Latvian exchange rate is 1Euro=0.70 lats. If Latvia had switched at the same time as Lithuania, it would have been 1Euro=0.55 lats. If Latvia had pursued the Estonian strategy of pegging to Euro from the beginning, it would have been around 1Euro=0.60 lats. By switching in 2004, Latvia unintentionally devaluated its currency, pushing both prices and salaries in euros down by 15-20% from what they would have otherwise been. As a result, the gap between Latvian and EU salaries became bigger than in the other two countries. With bigger gap, the rise in salaries and prices has been bigger.
I wish I could figure out how much of the inflation gap between Latvia and the other two Baltics is due to this effect and how much is due to other reasons...