Inflation soars in all three Baltic states, triggering renewed fears of contagion

From the Baltic Times:


Inflation soars in all three Baltic states, triggering renewed fears of contagion

RIGA - Consumer prices soared in September throughout the Baltic region, surpassing analysts’ expectations and sparking new fears of macroeconomic imbalances that could eventually lead to hard times.
In Latvia, the Baltic’s inflationary champion, consumer prices rose 11.4 percent annually as of September, the highest level in 10 years. Inflation for the month reached 10.9 percent, the highest since January 1997, the statistics agency said.

In Estonia, annual inflation reached 7.2 percent, significantly beyond the estimates of some 6.3 – 6.5 percent and leading some analysts to believe that 8 percent was a real possibility for the entire calendar year.
Finally, in Lithuania, where inflation has been relatively tame in recent years, the consumer price index catapulted to 7.1 percent based on September data. Again, the result was far higher than analysts’ expectations and pointed to the strong influence of global factors on domestic prices.
All the Baltic inflation data was released over the course of two business days (Oct. 5 and Oct. 8) and just after the three prime ministers met to discuss regional relations. The three heads of government agreed that global factors were partly to blame and that fiscal policy should be used to combat the runaway price increases.
“Inflation is an objective byproduct of the current economic development,” Latvia’s Aigars Kalvitis said, “and it will be impossible to solve the inflation problem in short term.”

Commenting as to why inflation in Latvia was considerably higher than in the neighboring states, Kalvitis pointed to Latvia’s skyrocketing wages, which increased 34 percent in the first half of the year. The comparable figures in Estonia and Lithuania were approximately 20 percent.
“[Inflation] is nothing special for the Baltic states,” said Estonia’s Andrus Ansip. “The situation is similar in other member states of the EU. Certain similarities with the U.S. can also be traced.”
Inflation in the Baltics is indeed as a result of phenomenal economic growth sparked by domestic demand and inexpensive credit, as well as years of a booming property market. In the upcoming months, rising energy prices – Russia’s Gazprom is charging more for a 1,000 cubic meters of gas – and soaring food prices are expected to lead consumer prices even higher.
No one is expecting the rate of increase in consumer prices to fall anytime soon. Some have said the first signs of a fall may occur only in the spring.

Latvia and Estonia were the two fastest growing economies in the EU last year, an accomplishment they could repeat this year. However, high inflation, unbridled wage increases, current account deficits and a labor deficit are conspiring to undermine economic gains and burst the Baltics’ bubble. A “hard-landing” scenario with GDP growth slowing to around zero cannot be ruled out, analysts say.
The September inflation data “is yet another sign that the Latvian economy is overheating – the risk of a hard-landing should not be ignored,” wrote Danske Bank in a research note Oct. 8. The bank said that the government’s anti-inflation plan has failed to accomplish what it was designed to do and that inflation could climb to 12 percent by the end of the year and 13 – 14 percent in the first quarter of 2008.
Latvia’s inflation last fell in May, when it hit an annual rate of 8.2 percent (as opposed to 8.9 percent in April).
Elina Allikalt, an analyst with Hansabank Markets in Estonia, said that her inflation estimates for that country over the coming months remained high, with October price increases expected to end up in the 7.3 - 7.7 percent range. Eight percent couldn’t be ruled out, she said.

“At the same time, the high anticipated inflation in October may be partially held back by the declining prices for motor fuel and a correction in the prices of various services,” Allikalt said.
Administratively regulated prices in Estonia climbed 7.4 percent and non-administered prices by 7.2 percent year-on-year, according to the statistics office.
If inflation has dogged Estonia and Latvia for months now, in Lithuania it is a relatively young phenomenon. In August annual inflation was 5.5 percent, so the sudden leap to 7.1 percent in September is a cause for serious concern.

Bulgaria is current the inflationary leader in the EU after its August inflation skyrocketed to 12 percent.
Meanwhile, a report by the Estonian Institute of Economic Research released Oct. 3 found that the labor shortage will remain a problem and will hinder attempts to increase output. The institute wrote in its survey that 42 percent of the managers interviewed said that the labor deficit was an obstacle to boosting output.