Estonian prices fall official 1.7 per cent, as deflation persists

(TALLINN) - Recession-hit Estonia remained locked in a deflationary trend in December, as prices fell by 1.7 percent against the same month in 2008, but edged closer to adopting the euro, data showed on Friday.

The figures from the Baltic state's national statistics office also showed that prices had risen by 0.1 percent compared with November 2009, after falling 0.2 percent in November from October.

In May 2009, Estonia, a former economic "tiger" now in the grip of a deep crisis, logged deflation for the first time since records began in the ex-communist state in July 1990.

Deflation -- a sustained drop in prices -- is seen as harmful since it can hamper activity further as buyers hold off while waiting for even better deals.

In the crisis-hit Baltic, however, it is also seen as a consequence of what is known here as "internal devaluation" whereby governments and companies are slashing spending and wages in a drive to boost competitiveness.

December's 1.7 percent marked a slowdown in the pace of deflation in Estonia. November's figure was 2.1 percent, after 2.2 percent in October and 1.6 percent in September.

Estonia, a country of 1.3 million, shifted rapidly from a communist command economy to the free market after independence from the crumbling Soviet bloc in 1991. It gained a reputation for breakneck growth, notably after joining the European Union in 2004.

Inflation hit a 10-year peak of 11.4 percent in April 2008, driven by domestic demand. It lost pace after Estonia slid into a recession in the second quarter of that year.

Estonia's economy contracted by up to 15.3 percent in 2009, according to official forecasts, and is expected to shrink 2.6 percent this year.

Inflation's rapid fall has brought Estonia closer to its goal of adopting the euro by January 2011, a move that it says would boost investor confidence.

Estonia had aimed to switch to the euro in 2007 but rampant inflation sent the plan off track.

Under the Maastricht Treaty which created the euro, countries must meet certain conditions before switching. They mainly concern inflation, public finances, debt and exchange rate stability -- the Estonian kroon is pegged to the euro.

The Maastricht criterion is annual average inflation. Prices in Estonia fell in 2009 by an average 0.1 percent, well below the limit, Friday's data showed.

Brussels has said Estonia could a green light by June for its 2011 switch.

Estonia's centre-right government has reined in spending to bolster efforts to meet the Maastricht public finance criteria.

Sixteen of the EU's 27 member nation now use the euro. Estonia would be the third ex-communist state to switch, after Slovenia and Slovakia.