One-off inflation numbers test euro readiness

TALLINN - Estonian consumer prices rose in March at the fastest monthly pace for more than two years on higher food and energy costs, raising concerns about whether the country will remain within price-stability limits required for it to be accepted into the group of nations using the euro, reports Bloomberg. Consumer prices increased 1.3 percent from the previous month, the biggest increase since a decade-high rise in January 2008, said the Tallinn-based statistics office.

Prices increased an annual 1.7 percent from a year earlier, following a 0.1 percent decline in February.
“Today’s inflation pace could indeed hand additional arguments to those who have resisted Estonia’s eurozone entry from the start, even though one-month data shouldn’t be used to make too far-reaching conclusions,” said Hardo Pajula, a Tallinn-based economist with SEB. Pajula expects inflation to be 2 percent in 2010.
Estonia aims to be the third east European nation to join the euro region, after Slovenia and Slovakia, next January. The European Commission and the European Central Bank are due to report next month on whether Estonia meets the currency bloc’s fiscal and inflation targets, serving as a recommendation for a final decision by the European Union in July.

“The March inflation jump was a one-off and price increases will be much more moderate ahead,” said the Finance Ministry, citing weak domestic demand for the moderation. The 12-month average inflation rate, the EU target rate for price stability, was a negative 0.7 percent in March, “clearly below the reference value,” the ministry said.
Euro applicants need to keep inflation within 1.5 percentage points of the 12-month average inflation rate of the three EU nations with the lowest annual price growth, according to targets set out in the Maastricht Treaty.

Estonia’s efforts to join the euro zone may be threatened as budget problems among existing eurozone countries and the disputes over emergency aid for Greece may hamper agreement on Estonia’s entry, said Nordea analysts Anders Svendsen and Annika Lindblad last month. March inflation was higher than expected, “mainly due” to a seasonal increase in food prices, higher energy prices and the ending of some discounts at retailers, the central bank said in a statement.

“Further price adjustments are necessary, taking into account a large contraction of the economy,” it said. The central bank will release an updated inflation forecast on April 20, it said. It saw average annual deflation of 0.4 percent for 2010, in its last outlook published in October.

Prices for consumer goods have been in decline since last May as the Baltic country’s deepest recession since independence in 1991 has undermined demand. Prices harmonized to EU standards will rise an average 0.4 percent this year as rising energy prices and government tax increases outweigh sluggish domestic demand, the ministry said in January.

Prices of food and non-alcoholic drinks, the biggest item in the consumer basket, rose a monthly 2.4 percent as fresh vegetable prices jumped 31 percent and eggs were 11.8 percent more expensive than in February, the statistics office said. Clothing prices grew a monthly 2 percent and housing costs rose 1.3 percent, following an increase in electricity and heating tariffs.

“Such a trend in CPI raises the risk on euro criterion,” said Violeta Klyviene, the senior Baltic economist at Danske Bank. “If global oil prices continue to rise, the inflation trend would be really unfavorable for Estonia.”