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Friday, December 7, 2007

Estonia Inflation November 2007

First off I would like to say that despite all rumours to the contrary, I have not given up on the Baltics. Far from it. But I have been busy trying to improve my understanding of the problems, in part by looking at Romania, and even more to the point at Russia. If Mother Russia catches the Baltic illness, then we will all be in trouble, oh deary me! I have also been peering and peering into what is happening in Hungary, to try and see if anything can be learnt from finding out why Hungary is so different from the rest of the EU10, as well as what the correction in Hungary can tell us about what might happen next in the Baltics. The only definitive conclusion I can offer you is that addressing the domestic demand issue without takling the currency value question raises the danger of making any correction a very protracted and painful affair, and even then the problem may not be solved. So there are clear, and to the point, arguments for ripping off the band-aid in one foul stroke.

Well, now back to matters in hand, inflation in Estonia. According to Statistics Estonia, the percentage change of the consumer price index in November 2007 compared to November 2006 was 9.1%. On average, the prices of goods and services in November 2007 were 1.4% higher than in October 2007. The broke down into a 15.1% increase in food and non-alcoholic beverages, 13.4% for housing, 9.2% for health, and only 3.3% on household goods. Put another way, the rise in the nontradeable sector (apart from agriculture and fuel, where global prices do play a big role) carried the weight of the increase. In other sectors pressures for import substitution keep some sort of a lid on prices. As we will see in the chart, in recent months inflation - as in many other parts of the EU10 as well as in Russia and Ukraine - is now starting to climb up towards the roof.

What happens next? Well this is a difficult question to answer. Prices will obviously keep rising until they no longer can (dragged down by and inability to export and by falling domestic demand), but at the present time there is much less evidence of this in Estonia than there is in, say, Latvia, where the slowdown seems to be gathering momentum rather more rapidly.

Initiated by the dominant Swedish banks and encouraged by recent government restrictions, a supply-led credit slowdown is slowly but steadily developing into a demand-led slowdown. Private sector credit growth in Estonia slowed to 39% Y-o-Y in October, down from a 66% rate in mid-2006. In Latvia, the same measure was down to 42%Y-o-Y from 61% Y-o-Y.

The number of real estate transactions in Estonia has also fallen by 25% between Q2 and Q3 2007 to reach its lowest level for three years. So things are moving. But where? Well, watch out for more posting which should now come thick and fast over the next week, as little by little I try to work out what I myself really think about the answer to that question.

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