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Thursday, August 21, 2008

Estonia and Latvia Producer Prices July 2008

Prices of goods leaving Estonian factories and mines rose an annual 7.8 percent in July, accelerating for the second time in eight months (from 7.5% in June) as the cost of making electrical appliances and textiles increased.

Even more worryingly perhaps, the percentage change in the export price index was 0.1% compared to June and 4.3% compared to July 2007. Since the Estonian economy can now only realistically grow by increasing exports, and the kroon is pegged to the euro, these costs are passed directly on to many of Estonia's potential customers. The month on month export price index was mainly influenced by the increase in prices in the manufacture of chemicals and chemical products and food products and beverages and by the decrease in prices in the manufacture of wood and wood products and in the manufacture of rubber and plastic products.

Wage growth, the main impetus behind the growth in producer prices over the two years to November, is still close to its 2007 peak, as the labour market remains tight and wages refuse to correct moving into the recession. A weaker-than-expected slowdown in wage growth threatens the competitiveness of Estonian exports according to a statement from the central bank on April 16.

Nevertheless, disappointing as the Estonian figures are, they are still considerably better than the Latvian ones. Compared to June 2008, producer prices in Latvian industry increased in July by 0.3%, according to data from the Central Statistical Bureau of Latvia. Year on year (compared to July 2007) producer prices increased by 12.4%. And as regards export prices, compared to June 2008, producer prices in Latvian export industries increased by 1.3%, and year on year export producer prices were up by 7.1%.

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