Estonia warned on inflation threat

TALLINN - Estonia’s Prime Minister Andrus Ansip, says that the country has “few tools” to control price increases after being told by European Central Bank President Jean-Claude Trichet to remain “alert” on inflation after adopting the euro next January, reports Bloomberg. Inflation expectations in the Baltic nation of 1.3 million people are rising because of an increase in food and fuel prices and concern that euro membership will boost prices.

“The government has few tools at its disposal to contain inflation,” Ansip said in an interview during a visit to the Latvian capital Riga on Sept. 24. “The budget is practically the only instrument. A small and open economy like ours can’t avoid the pain with outside price pressures.”
The European Union in July approved the country’s application to adopt the bloc’s common currency beginning next year. Trichet said on Sept. 20 that Estonia must remain “alert” on price developments and take “forceful” action to stem inflation after joining the euro-region bloc.

Estonia’s Finance Ministry expects inflation to average 2.6 percent this year, while annual price growth may reach 4 percent by year-end. The ECB aims to keep price growth at less than 2 percent.
The government approved a draft 2011 budget that targets an overall fiscal deficit of 1.6 percent of gross domestic product, compared with a projected 1.3 percent this year. Last year’s 1.7 percent gap was wider than only Sweden’s and Luxembourg’s in the 27-nation EU.

Ansip’s government approved freezing public-employee wages for 2011, pending parliamentary approval. The Cabinet will phase in a tobacco-tax increase over two years from January to slow its impact on inflation. It is too early to say whether a wage freeze would need to continue beyond 2011, Ansip said on Sept. 24.
Euro adoption “can’t be blamed” for accelerating price increases of food, Ansip said. The rising price of dairy products is also “the main headline” in Latvia, which isn’t due to adopt the euro until 2014, Ansip noted. Most Estonian retail chains raised milk prices by about 25 percent last month, the Baltic News Service reported.
Inflation expectations by Estonian consumers continued to rise in September, according to Konjunktuuriinstituut, an economic research institute in Tallinn. The outlook is “certainly” affected by the prospect of euro adoption, the institute said.

Thirty-five percent of consumers polled by the institute in September expect inflation to accelerate in the next 12 months, compared with 32 percent in August, and 5 percent a year earlier, it said.
The state prosecutors’ office launched an investigation last month to see whether the bread producers’ association engaged in a price cartel. The association said in August bread prices will be increased by as much as 20 percent due to higher production costs.