Annual inflation in Latvia in March jumped to 8.5 per cent, the highest figure in a decade, the Latvian Statistics Bureau announced on Wednesday. 

The figure is the highest seen in Latvia since a financial crisis in mid-1997, Oskars Alksnis of the bureau's consumer price department reported.

Over the course of the year, inflation was chiefly driven by price rises in the hospitality industry and for staple foods, such as bread, meat and vegetables, the bureau said in a press release.

Rises in the cost of heating also influenced the overall figure, pushing total inflation up by almost half a percentage point, the press release added.

The news comes shortly after two international rating agencies downgraded Latvia's outlook from "stable" to "negative," citing growing imbalances in the Baltic state's economy.

The Standard & Poor's agency made its downgrade in February, while the Fitch agency followed suit last week.

"The outlook change reflects the increased risk of an abrupt adjustment in capital and financial flows or a prolonged, painful slowdown in economic growth," Fitch said in a press release.

And it comes only days after the Bank of Latvia announced that the nation's current-account deficit almost doubled over 2006 to a massive 21.1 per cent of GDP, fuelling fears that the country's economy is now running too fast for its own good.

Last year Latvia posted economic growth of 11.9 per cent, one of the highest figures ever seen in the EU. However, inflation has been above 6 per cent ever since Latvia joined the EU in 2004, leading to warnings of possible overheating.

A month ago the Latvian government announced a broad-based plan to reduce inflation by gently reining in its own spending and encouraging the public to save more and spend less, especially in the overheated property market.

The plan met with a mixed reaction, with some observers saying that it was neither timely nor ambitious enough.