TALLINN - Annual inflation in Estonia reached 5.7 percent in August, with economists warning of an even loftier rise next year if the national electric company gets its wish and has a higher than expected tariff increase approved.
The Statistics Office announced Sept. 7 that the consumer price index at the end of August had increased over the last 12 months on a surge in services, which jumped 11.1 percent from August 2006. The prices of goods increased only 2.9 percent, though food was up 5.7 percent year-on-year, in line with overall inflation.
The biggest influence of the index was housing, food and cheaper motor fuel, the office said. Expenses for housing increased 16.6 percent, while dining and accommodation were up 11.1 percent.
In August the Finance Ministry announced a new set of inflation forecasts for the next two years, with the consumer price index expected to increase 6.1 in 2007, 7.4 percent in 2008 and then 5.3 percent in 2009.
However, the ministry factored in a 6 percent rise in electricity for 2008, while Eesti Energia (Estonian Energy) has applied for a 23 percent hike.
The state-owned utility said the sharp increase was needed to cover higher costs for extracting oil shale, its main source of fuel, and electricity generation. The company said it was also planning to raise the price of its grid services.
The hike, if approved, could have a devastating effect on inflation. As Finance Ministry spokeswoman Kristi Kunnapas explained, a 15 percent rise in the electricity price next year would translate into an additional 0.26 percentage points to next year's inflation forecast. A 25 percent increase would denote a 0.55 percentage point gain.
However, Kunnapas added that Eesti Energia usually applied for a larger hike increase than necessary in order to allow for a "safety margin."
Finance Minister Ivari Padar and Meelis Atonen, deputy chairman of the Reform Party and member on the supervisory board of Eesti Energia, both said the 23 percent request is too steep.
"I suspect that the Eesti Energia board has once again proceeded from the traditional assumption that it would have to ask more than necessary from the Energy Market Inspectorate," Atonen told the daily Eesti Paevaleht.
Atonen said the utility was trying to outwit the watchdog and that the latter wouldn't allow it to happen.
Hansapank analyst Maris Lauri also said that the price hike was too steep.
Estonia's economy was the second fastest growing in the EU last year 's behind Latvia 's but is currently undergoing a significant slowdown, or soft-landing, with second-quarter GDP growth amounting to 7.3 percent, down from 9.8 percent in the first quarter.
The government recently decided to increase excise taxes on alcohol and cigarettes, which it must do in accordance with EU directives to meet convergence with wealthier member states, and absorb the inflationary consequences sooner rather than later.
