RIGA — Consumer prices continue to retreat in Latvia, and in December were down 1.2 percent year-on-year and 0.5 percent on a monthly basis, the ninth straight month that prices fell.

The data, released Monday by the country’s statistics bureau, confirms that the government’s policy of domestic deflation is well under way, while forecasts indicate that the price correction will continue well into 2010.

In fact, prices in Latvia — which for years was plagued with the highest inflation in the European Union — have now reached the level of August 2008, according to Aija Žigure, chairwoman of Latvia Statistics. She told a press conference that some prices, such as for milk, have fallen to 2007 levels, while those for vegetables are back to where they were in October 2006.

But the December-to-December fall of 1.2 percent was particularly poignant, since over the respective statistic one year ago was 10.5 percent inflation and two years ago 14.1 percent. As expected, average annual inflation was higher and amounted to 3.5 percent for 2009. Still, this was down from 15.4 percent in 2008 and 10.1 percent in 2007.

The dramatic shift from double-digit inflation to low inflation or even deflation is testimony to Latvia’s painful program of economic reform, which has primarily boiled down to steep budget cuts, particularly in public sector wages, and other austerity measures.

It remains to be seen whether this policy of domestic deflation was the right one for Latvia, the other being a currency valuation that was strongly rejected by both the previous and current governments as being the worst of two evils.

The key is to restore competitiveness to Latvia’s economy, which was all but destroyed after four years of mind-numbing growth. During those “fat years” wages increased at an alarming rate — in the public sector they soared some 32 percent in 2006.

Looking ahead, consumer prices are expected to tick downward throughout the year, though a sudden spike in energy prices or a change in taxes — neither of which can be ruled out — could force a correction.

Barring any unexpected shock, however, prices have only one way to go in Latvia this year.

“As far future developments of [the consumer price index] in Latvia, the weak domestic demand outlook would determine the continuation of a deflationary trend,” Danske Bank said in a research note.

Swedbank forecast in its Baltic macroeconomic review that average annual prices will fall 4 percent in Latvia in 2010 and be flat in 2011.