Estonian deflation slows

(TALLINN) - Recession-hit Estonia's deflationary trend eased in January as prices fell by 0.7 percent against the same month in 2009, official data showed on Friday.

The Baltic state's statistics office said the pace of deflation had continued to slow, after prices fell 1.7 percent in December, 2.1 percent in November and 2.2 percent in October.

Compared with December 2009, prices in January rose 0.4 percent, driven by increased costs of heating oil, motor fuel and food, after having increased by 0.1 percent in November and fallen 0.2 percent in 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 a consequence of what is known as "internal devaluation" whereby governments and companies slash spending and wages in a drive to boost competitiveness.

Finance Ministry spokeswoman Piret Seeman told AFP deflation was likely to end in March.

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 joined 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 14 percent in 2009, according to official estimates, and is expected to shrink 0.1 percent this year.

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

It is widely expected to get an EU green light in July.

Estonia aimed to adopt 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. Besides inflation, they mainly concern public finances, debt and exchange rate stability.

The Maastricht measure is annual average inflation. Official data for that is due later this month, but the rate in January was around minus 0.3 percent, Seeman said.

Across 2010, annual average inflation is likely to be 0.4 percent, she added, well within the current Maastricht benchmark of 1.5-1.8 percent.

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.