Estonia's Inflation Rate Rises to Six-Year High

From Bloomberg recently:

Estonia's Inflation Rate Rises to Six-Year High


Estonia's inflation rate increased to a six-year high in July on rising energy costs, adding to concern the Baltic economy is overheating.

Annual inflation accelerated to 6.4 percent, the fastest since June 2001, from 5.8 percent in June, the statistics office based in the capital Tallinn said on its Web site today. Prices rose a monthly 1.1 percent.

Standard & Poor's Ratings Services lowered Estonia's rating outlook to negative from stable last month, citing a higher risk of a ``hard landing'' due to a wide current-account deficit and accelerating inflation. Estonia was forced to delay euro adoption twice last year as economic growth pushed consumer prices beyond targets required for the currency switch.

``While growth rates are slowing, unfortunately inflation remains high,'' Anne Karik-Uustalu, an economist with Sampo Pank in Tallinn, said by phone. ``It's all due to inertia.''

Estonia's economic growth rate, second only to Latvia in the European Union, slowed to 9.8 percent in the first quarter. Inflation may peak next year as consumer confidence along with purchasing power starts to slow, the economist said.

Tax Increases

From July, the government increased the value-added tax on heating to 18 percent from 5 percent to meet the requirements of the European Commission. Inflation will remain at similar levels in coming months as energy-price increases filter into the economy, Karik-Uustalu said.

S&P said on July 2 that Estonia's ratings may be lowered if inflation accelerates to a level that is ``inconsistent with medium-term euro-zone accession.'' The rating agency also said plans to loosen budget policy would further fuel the $15.1 billion economy.

Unemployment at a 15-year low and wages rising an annual 20 percent in the first quarter boosted Estonians' spending on housing, food and cars, with private consumption rising in the same period at the fastest pace in 14 years.

Euro adoption is limited to countries that meet targets on inflation, budget deficits, debt, interest rates and currency stability. Inflation must be within 1.5 percentage points of the 12-month average rate of the three EU states with the slowest consumer-price growth. The target was 2.8 percent in June while Estonia's rate was 5 percent.