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Monday, April 7, 2008

Estonia Inflation March 2008

Estonia's inflation rate fell back slightly in March from what was virtually a 10-year high in February as the growth rate in food and housing costs eased back slightly. The annual rate dropped to 10.9 percent from 11.3 percent in February, according to data from the statistics office in Tallinn this morning. Prices rose a monthly 0.8 percent.

Prices of food and non-alcoholic drinks rose an annual 16.7 percent, compared with 17.1 percent in February, the statistics office said. Housing costs rose 14.9 percent, down from 15.2 percent in February. But prices of services are still increasing strongly, transport is rising at a 13.7% annual rate (2.1% m-o-m) and hotels and restaurants at a 15.5% one (1.1% m-o-m). So core inflation is still very high, and in the background wages continue to rise at a very steep pace.

Update May 2 2008

This report in the press today about possible gas price rises in estonia caught my eye. At this point it is hard to say whether or not Eesti gas will get the full price rise they are seeking, but nonetheless the increase is still likelyy to be substantial, which really must raise a lot of concern about the level consumer price inflation will be running at during the first half of 2009.

AS Eesti Gaas, an Estonian gas company, applied to raise prices for consumers 41 percent between September and October, Eesti Paeevaleht reported, citing management board member Raul Kotov.

Gas prices would rise 35 percent for an average household if the application is approved by the Estonian Competition Board, the newspaper quoted Kotov as saying. Eesti Gaas, owned by Russia's OAO Gazprom, E.ON Ruhrgas AG of Germany, and Finland's Fortum OY, has 120,000 household customers, the newspaper said.


Verlinden D (Belgium) said...

Why don't the Baltics deal with the inflation by tightening their fiscal policy? I know it will not be a popular measure among citizens, but it will lead them to a quick eurozone entry. It seems like they are not really anxious to join the eurozone as soon as possible. Could this be? I would like to read more about this subject. Are there official publications on this matter?

PS the articles are very well written and thoroughly documented with appropriate data

Edward Hugh said...


"Why don't the Baltics deal with the inflation by tightening their fiscal policy?"

Well the IMF have ben arguing this with the Baltic states (and other parts of east Europe with the same sort of problem like Ukraine, Romania, Bulgaria etc) for some time now. But I can't answer your question as to why they didn't listen.

But this takes us back about 18 months. IMHO there are only two ways all this could have been avoided, one was by running a fiscal surplus - maybe 4% of GDP according to the IMF - and the other was by having and active labour policy encouraging inward migration from poorer countries - the problem isn't only that they have been growing too fast, it is that they have been growing to fast with insufficient labour supply (due to out migration to countires that pay higher wages in Western Europe and long term low fertility which means there are less and less new labour market entrants).

And the migration issue can't be resolved by recruiting in the region - since basically all the EU10 countires plus Ukraine, plus Russia (don't miss Russia's growing inflation and they DO have a budget surplus, although they could increase it) have the same problem - so they need to go further afield. The Czech Republic is currently very active in Vietnam and Mongolia, and what we need in the Baltics is a lot more imagination and initiative in this regard. Basically if you don't have children - or children in sufficient quantities - then you need migrants to make up for the missing labour supply.

However, it seems to me that the Baltic authorities tried to go the other way and were soft on wage rises in the early days since they thought that if wages went up then people could be attracted back from western Europe. As we can now see this strategy doesn't work, since you simply become uncompetitive. So now the big danger is that we get some sort of ongoing slump - following the boom bust dynamic - and even more people leave for the west to get away from the crisis, which obviously will make any discovery slower and more difficult.

So the governments in the Baltics now face serious difficulties in taking decisions, given that domestic demand is now dropping rapidly, and with the bust in domestic demand price rises will come grinding to a halt, and my best guess is that if the "screech to a halt" is sharp enough - as it looks more and more like it may well be - then what we could really be facing is strong deflation in wages and prices - and especially if they try to hold on to the pegs with the euro, which I imagine they will, at least during a first phase.

So in fact at this point - and given that normally policy has some sort of lag before it impacts (say six months) - what may be needed is fiscal stimulus to break the fall. This is a very hard one to call given the continuing strength of the inflation, but we must be moving in that dircetion.

"It seems like they are not really anxious to join the eurozone as soon as possible. Could this be?"

Far from it, part of the whole mess is that people from outside these countries have been lending Baltic citizens money at reasonably cheap rates and in euros on the assumption they would soon be joining. As this membership moves farther and farther off into the distance these lenders become more and more reluctant to lend - since the risk of devaluation at some point just goes up and up - and hence the crisis deepens.

"Are there official publications on this matter?"

Yep, quite a lot. Maybe the best starting place are the central bank web sites (perhaps the Latvian one to begin with), and things like speeches of the governors on why they adopted the pegs. Or economic policy statements.

Also if you go to the site of Economy and Finance at the EU Commission there is a lot of material and you can learn a lot just browsing around. But if you click on Economic Situation in the left sidebar, and then on Economies of the Member States you will find a map showing all the EU countries, click on any of these that interest you.

If you then go to the part headed Assessment of the (country X) convergence programme you will find a lot of detailed reports, so it depends how far you want to go. Good luck and good hunting.