Crisis fuels price increases

  • 2010-11-03
  • From wire reports

TALLINN - Prices in Estonia have gone up by 12 percent on average in the three years since 2007, notably more than in the EU, which has posted a 7 percent increase in prices, reports BBN. According to economists Leev Kuum, researcher at the Estonian Market Research Institute, Maris Lauri, a Swedbank analyst, and Hardo Pajula, analyst at SEB, Estonia’s faster-than-average price increase is caused by the relatively low price level, the small size of the market and the country’s liberal economic policy.

Other key aspects that have triggered a rise in prices include the government’s decisions to increase tax and excise duty rates in order to keep a low budget deficit. Manufacturers and traders have also raised prices as much as they could, since there is low competition in many sectors. “It’s inevitable because in small countries, competition is weaker than in big ones,” said Kuum.

“In the medium-term perspective, the price increase is mainly influenced by monetary policy, which in the case of both the currency board system and in the euro area will be outside the hands of the government and Estonian central bank,” said SEB Pank Economist Hardo Pajula.

Estonian consumer prices rose 4  percent from a year earlier in September, the biggest jump since January 2009, compared with 2.9  percent in August. The key drivers behind the price growth were rising food and heating prices, according to Statistics Estonia. Goods were 4.5 percent and services 3 percent more expensive compared to September of the previous year. Food products were 7 percent and manufactured goods 2.2 percent more expensive.
Regulated prices of goods and services went up by 8.1 percent and non-regulated prices by 2.7 percent compared to September of the previous year.

Inflation expectations in Estonia are rising because of increasing food and fuel costs and concern that adopting the euro in January will boost prices. The central bank is trying to protect Estonia’s economic recovery after inflation accelerated to 10.6 percent in 2008, choking off domestic demand and contributing to the European Union’s second-deepest recession during the global financial crisis.

The global food price rises become a new risk factor for Baltic inflation, given that the Baltic economies tend to absorb price shocks to a much larger extent,” said Violeta Klyviene, senior Baltic analyst at Danske Bank in Vilnius. Estonia has “few tools” to control price increases, Prime Minister Andrus Ansip said last month, in response to a Sept. 20 statement by European Central Bank President Jean-Claude Trichet that Estonia must remain alert on price developments and take forceful action to stem inflation after joining the euro-region economy.