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Estonia: Another inflation shock
Real estate news By Lars Rasmussen
Fri, Oct 5 2007, 11:01 GMT
Today we received September inflation numbers for the Estonian economy. Price growth yet again surprised on the upside, as CPI came out at 7.2% y/y (1.1% m/m) - somewhat above our expectation of 6.6% y/y (0.5% m/m). According to the Estonian statistics office, increasing costs for housing and food stuffs were the main drivers behind the acceleration in consumer price growth rates. More specifically, housing costs were up 16% y/y in September, food and non-alcoholic beverages added 7.8% y/y, while health costs rose 9% y/y.
Inflation remains a key macroeconomic concern, and we expect inflation to rise further into 2008 - despite the slowdown in domestic demand. The main drivers of inflation will be the continued excessive wage growth, energy prices and to some extent higher food prices. We expect inflation at 6.5% y/y in 2007, 7.6% y/y in 2008, and 5.9% y/y in 2009. The risk to the forecast is clearly to the upside - especially given today’s release.
Lately several ECB officials have expressed their concern about the increasing imbalances in the Central and Eastern European economies (incl. the Baltic States). Also the IMF and the World Bank have warned about the dangers of overheating in CEE - see also Flash Comment - New Europe: Does the ECB dislike the CEE currency boards?, October 04. We are still waiting for policymakers to take action to curb inflationary pressures.
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