Monday, May 11, 2009

Deflation to reach Estonia

While Estonia was struggling a year ago, like many other countries in the world, to fight against inflation in order to respect the limit set by the EU to adopt the euro, the country now has to face deflation.

Since the beginning of 2009, Estonia has known unparallel low inflation rates since the independence of the country. In April, the rate was 0.3% and analysts forecast a deflation of 0.2 to 0.5% in May.

Concretely, deflation is not bad since it means lower prices for the consumers. However, it is a real nightmare for macro analysts. Indeed, competitiveness improves but at the same time people expect prices to decrease even more and postpone the act of purchase, jeopardizing even more the economy.
Ruta Arumäe, macro analyst at SEB explains that the reason of deflation is cheaper foodstuff (added to heating and energy prices): “Last year the prices of foodstuff grew much, but it comes downwards just the same”. She added that deflation is positive as long as it isn’t difficult to get out of it. “Currently deflation is necessary for the price increase has been very fast in previous years and hit people’s wallet. People’s incomes currently lessen. General price level should come downwards sensibly,” Arumäe said.
Neivelt said that deflation is a global issue, but he doesn’t exclude the prices will move the other direction soon again.
Jüri Mõis, a businessman doesn’t see a threat in deflation. “Deflation won’t last forever, then comes inflation again and then deflation. That is the environment, it’s difficult to say whether it’s positive or negative,” Mõis said.

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