TALLINN - Annual inflation amounted to 4.1 percent last year in Estonia, according to preliminary estimates by the Statistical Office, while the Bank of Estonia has predicted the indicator will fall to 3.4 percent in 2006. In 2004, prices rose 3.0 percent.
Experts said the 4.1 percent rate was 1.9 percentage points higher than the expected average inflation for the EU25.
The Statistical Office explained that the consumer price index was mainly affected by a rise in motor fuel prices and an increase in housing expenses.
The higher-than-anticipated inflation has Estonia's leadership in a quandary, as most politicians have their heart set on adopting the euro as early as 2007. Considering that Estonia already runs a consistent budget surplus (the only EU country to do so), it remains to be seen what the ruling coalition 's the Reform Party, the People's Union and the Center Party 's will do to combat the macroeconomic menace.
Already there is pressure from the People's Union to run a budget deficit, which Reform leader and Prime Minister Andrus Ansip has rejected.
"Inflation is expected to accelerate somewhat early this year, but it should slow down again later on," Hansapank analyst Maris Lauri told the Baltic News Service.
"The slowdown of inflation is going to be slow, because wages are rising fast, competition is relatively weak in some spheres, in particular services, and prices of major imported goods are not likely to come down, at least not to a significant degree," she said.
Lauri said she believes consumer prices will rise by around 3.5 percent this year. At best, the rise could amount to only 3.3 percent, but this would require a significant slowdown in loan growth, a wages growth rate of less than 10 percent and fuel prices staying at the current level, or even decreasing.
"At the same time, the possibility of prices rising by as much as 3.8 percent is perfectly realistic if incomes continue growing fast and especially if world prices go up," Lauri said.