Swedbank Analysis - June 14, 2011

Swedbank Analysis June 14, 2011

Hazy inflation trends in the Baltic countries:
it’s time to get lucid
• Consumer price inflation in the Baltic countries during
2004-2009 was driven both by fundamental factors
(e.g., price and productivity convergence with the ad-
vanced EU countries) and a mix of supply and de-
mand factors at different stages of the business cycle.
• Recent price developments in 2010-2011 are mainly
driven by global commodity prices. As of local factors,
there are hints that insufficient competition may also
be playing a role, especially for food price inflation.
• Inflation in the Baltic countries is expected to deceler-
ate next year, mainly due to stabilising global com-
modity prices. But causes for concern are shortage of
skilled labour (despite still high overall unemployment)
and rising inflation expectations, which might exert
upward pressure on wages.
• Timely policy actions are appropriate and necessary.
Structural reforms, especially in the labour market, to
improve overall flexibility, cost efficiency and produc-
tivity, higher price transparency and stronger competi-
tion are some of the actions that can help to curb infla-
tion in a sustainable way. Fiscal prudency, as well as
stable and predictable tax policy are crucial too.

This paper focuses on recent consumer price inflation developments in
the Baltic countries, comparing them with those in the European Union
(EU). In May 2011, annual consumer price inflation reached 5.4% in Es-
tonia, and 5% in Latvia and Lithuania. It is clear that global commodity
price growth has been the main factor behind the recent rise in inflation.
However, it is crucial to understand what other factors affect price growth
in order to forecast inflation and to know what local authorities can and
should do to curb inflation.

Economic Research Department.
Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000
E-mail: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720

There are four main reasons why inflation developments are so important
to analyse. First, growth in costs of businesses and overall price level can
have a direct effect on competitiveness, which is particularly important for
the Baltic countries, since their economic recoveries are export driven.
Second, since consumer price growth diminishes the purchasing power
of households and, very often, that of poorer ones relatively more, social
cohesion issues come to the fore. Third, rising inflation may serve as an
early sign of a build-up of domestic imbalances in the economy. Fourth,
the exit strategy from the recent crisis for Latvia and Lithuania is the in-
troduction of the euro in 2014. This implies the necessity to comply with
Maastricht criteria, including the one on inflation.

1. Economic background

The accession of the Baltic countries to the EU in May 2004 was followed 2004-2007: boom years
by large inflows of foreign capital and a very fast and excessive leverag-
ing up of the private sector, resulting in a real estate boom-bust scenario.
This process was driven by excessive optimism on future incomes,
banks’ competition for market shares, and globally high risk appetite. The
credit-to-GDP ratio grew to levels comparable to those in advanced
economies – loans to resident households and nonfinancial corporations
in Estonia went up from 41% of GDP in 2004 to 94% in 2008, in Latvia
from 44% to 82%, and in Lithuania from 26% to 59%. In Latvia – and, to a
somewhat lesser extent in Lithuania – an expansive fiscal policy has also
played a role.

Excessive credit growth and optimism in all three Baltic countries resulted
in an unsustainable domestic demand expansion, mainly fuelled by pri-
vate consumption. Wages grew faster than productivity, thereby worsen-
ing external competitiveness (see Section 3 for more details). Ease in
getting credit and excessive optimism about future incomes boosted de-
mand for real estate, thus causing housing prices to rise dramatically
(supported also by an insufficient housing supply).

Excessive growth in leverage resulted in rising current account deficits –
which peaked at 22.3% of GDP in 2007 in Latvia, 14.5% in Lithuania, and
17.2% in Estonia – ballooning foreign debt, and increasing vulnerability to
volatility in access to foreign financing.

The correction of built-in imbalances started in 2008-2009 (real estate 2008-2009: recession
prices had started to retreat in 2007). The collapse of demand in domes-
tic and foreign markets led to a dramatic fall in economic activity. The
cumulative fall in GDP was 25% in Latvia, 20% in Estonia, and 17% in
Lithuania. This led to an increase in unemployment and reduction in
wages. In the first quarter of 2010, the unemployment rate peaked at
20.4% in Latvia and 19.8% in Estonia, while in Lithuania it reached its
maximum in the second quarter of 2010 at 18.3%. Gross average
monthly wages declined in 2009 by 4.6% in Estonia, by 4.1% in Latvia,
and by 4.4% in Lithuania.

With diminished purchasing power and increased uncertainty about future
incomes, households’ willingness to spend decreased – domestic de-
mand fell and savings rates increased. The household gross savings

2 Swedbank Analysis • June 14, 2011

rate 1 rose most in Estonia – from 3.4% in 2008 to 13.3% in 2009; in Lat-
via, over the same period, it increased from 5.0% to 9.4%, while in
Lithuania it soared from -2.3% to 6.6% (the savings rate was negative in
all three countries in 2007). Credit overdues rose, as households lost
their incomes or incomes were significantly below those in the boom
years.

The economic recovery of 2010-2011 has been export driven in all three 2010-2011: recovery
countries. From the trough in the second half of 2009 to the first quarter
of 2011, GDP rose by 10.4% in Estonia, 8.2% in Lithuania, and 3.8% in
Latvia. Domestic demand has remained weak, as labour markets natu-
rally show signs of revival later than GDP. The structures of economies
have become more balanced, and economic restructuring is set to con-
tinue (the longest path is for Latvia, where imbalances were the biggest).

2. Fundamental factors that cause more rapid
inflation in the Baltic countries than in the euro
area

During 2004-2008, consumer prices 2 rose by 45% in Latvia, 29% in Esto-
nia, and 26% in Lithuania. During the same period, prices in the euro
area increased by only 10%. What are the reasons behind this differ-
ence? Longer-term and cyclical factors are both at work. In this section,
we will look at fundamental longer-term issues and turn to cyclical factors
in the next section.

Index of consumer prices, 2005=100

150

140
EU27
130 EA

120 EE
LV
110
LT
100 HU
PL
90

80
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat

Convergence and the Balassa-Samuelson effect
The more rapid inflation in the Baltic countries can be partly explained by As an economy improves
the Balassa-Samuelson effect. This effect describes the mechanism of its productivity, price
the catching-up process, when faster growth in relative productivity in
levels rise …
tradable sectors causes quicker wage increases, which are later transmit-
ted into the nontradable sectors. This causes higher inflation in the catch-
ing-up countries. The Balassa-Samuelson effect in Central and Eastern
Europe (CEE) has been widely analysed and by and large confirmed, see
Lojschová (2003), Coudert (2004), Mihaljek and Klau (2009), and others.
However, there is controversial evidence on the relative size of this effect,

1
The gross savings rate of households is defined as gross savings divided by gross dis-
posable income. Gross savings is the part of the gross disposable income that is not spent
as final consumption expenditure (thus savings include also repayment of loans).
2
Here, as well as later in the text and in the graphs, the harmonised index of consumer
prices (HICP) is used (Eurostat data).

Swedbank Analysis • June 14, 2011 3

because of questions about data reliability, e.g., the empirical split be-
tween tradable and nontradable sectors.

Another part of the convergence process is an increase in prices, as pro-
ducers shift to foreign markets, where prices are higher, and thus (given
their constrained capacity), raise prices of their output also in local mar-
kets. There is nothing wrong in inflation and price convergence per se,
but it becomes more dangerous if prices and wages increase faster than
productivity, thereby worsening external competitiveness. Unfortunately,
this was exactly the case in all three Baltic countries.

The largest excesses were visible in Latvia, where the ratio of the com- … but price convergence
parative price level to GDP per employed peaked at 134% in 2008 (being in the Baltics was swifter
at par with the EU27 average would place the value of this ratio at 100%). than productivity con-
This means that prices in Latvia had converged much faster than produc-
vergence in 2004-2008.
tivity and GDP per capita in the years following EU accession. In Estonia
and Lithuania, the excesses were smaller, but since 2004 they have both
lost competitiveness as well, as price levels have increased faster than
productivity. The ratio of the comparative price level to productivity
peaked in Estonia in 2008 at 111% and in Lithuania at 106% in 2009.

Relative price level, % of productivity level*, 2000-2009

140
120

100
80

60
40

20
0
EA EE LV LT HU PL
* Comparativ e price lev el (% of EU27) /
GDP per employ ed (PPP, % of EU27) Source: Eurostat, Swedbank estimations

In 2009, Estonia and Latvia managed to reduce this ratio – it declined to Some of the imbalances
106% in Estonia and 127% in Latvia, as both countries moved towards a corrected in 2009
more balanced situation. Most of the rebalancing was achieved through
deflation. It is very likely that the situation in these countries continued to
improve in 2010 (no data available so far), mostly via productivity gains.

Comparative price level indices, EU27=100

80

70 EE
LV

60 LT
HU
PL
50

40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Eurostat


During the recession, a bigger contraction in domestic demand caused a
deeper deflation in Latvia – relative price levels declined from 69.2% of
the EU27 average in 2008 to 67.3% in 2009. The adjustment in Estonia
was also deep – from 71.2% to 69.5%. In Lithuania, however, relative
prices remained at a broadly similar level – in 2008 and 2009, they were,
respectively, 60.5% and 60.7% of the EU27 average.

Compared with the Baltic countries, such CEE countries as Poland and
Hungary had more significant corrections of relative price levels in 2009.
But this was achieved via depreciation of the zloty and forint. The Baltic
countries chose to hold on to their fixed exchange rate regimes vis-à-vis
the euro and achieved lower relative price levels via deflation.

Comparative price level indices for main product groups, EU27=100 (2009)

120

100
EE
80
LV
60
LT
40
HU
20
PL
0
Housing Food and Transport Household Clothing and
non- furnishings footw ear
alcoholic
beverages Source: Eurostat

In 2009, the average price level was still below the EU average in the Average price levels in
three Baltics: by around 30% in Estonia and Latvia, and 40% in Lithuania. the Baltics are still below
However, clothing and footwear in the Baltic countries was more expen- EU average.
sive. One possible reason is that the Baltic markets are relatively small –
because producers, wholesalers, and retailers cannot benefit from
economies of scale, they may be introducing higher markups than their
counterparts in Western Europe. Furthermore, lower turnover also nega-
tively affects retailers’ bargaining power and their ability to obtain the
lowest wholesale prices. Another reason is the popularity of market-
places, where a lot of trade is unaccounted for and not taxed and thus
cheaper – further reducing the ability of retailers to achieve economies of
scale. Since cheaper clothes traded in the markets are at least partly un-
accounted for, their prices are not reflected in official statistics and thus
inflate the average clothing price level in the country. The recent reces-
sion has also increased the popularity of second-hand clothing retail.

There are unexpectedly large housing cost differences in the Baltic coun-
tries. Lithuania’s price level is at 43.8% of the EU average, whereas Lat-
via’s housing costs are at 60.6% and Estonia’s at 71.4% of the EU aver-
age. One reason why housing costs are much lower in Lithuania than in
the other Baltic countries is the widespread government scheme of hous-
ing expense discounts for poor households in the former, which signifi-
cantly cuts the average price paid for utilities. Furthermore, Lithuania and
Latvia, unlike Estonia, apply a reduced value-added tax (VAT) on heating
services.

Consumer basket is skewed towards necessities
Unfortunately, current global developments have a stronger impact on
inflation in the Baltic countries than in the euro area. In the former, food,
Stronger impact from
energy, housing, and transport make up 50-55% of the average house- global price growth
hold consumer basket, which is above the EU average (47%), especially


for food. Furthermore, poorer households spend an even bigger fraction
of their income on these products. 3 This means that current inflation hits
poorer households the hardest.

Weights of main product groups in consumer basket, 2011 (%)

30

25
20
EE
15
LV
10
LT
5 EA
0
Household Clothing & Transport Housing Adm. reg. Food &
equipm. footw ear prices non-
alcoholic
beverages Source: Eurostat

Food and nonalcoholic beverages make up 25.9% of the average Lithua-
nian’s consumer basket, and 24.6% and 23.3% of the respective baskets
in Latvia and Estonia. Except for Romania, no other EU country is as
highly dependent on food prices as the Baltic countries.

Not surprisingly, housing expenses in Lithuania have a lower weight in
the consumer basket than in other Baltic or European countries’ baskets.
This is directly related to housing costs – as we mentioned above, hous-
ing prices are relatively lower in Lithuania, as is correspondingly the
weight of these expenditures in the consumer basket. It is interesting that
Lithuania has not only a somewhat lower weight for heating expenses,
but also the lowest weight for water supply expenditures (4% vs. 7-8% in
Estonia, Latvia, and the euro area). One of the possible explanations is
the distribution of population between urban and rural areas – house-
holds in urban areas more often have self-sustained houses, without cen-
tral heating and water. For example, in Lithuanian urban areas, only 6%
were living without baths or showers in 2009, whereas there were 36%
such households in rural areas. Currently, 66.9% of Lithuanians, 67.5%
of Latvians, and 69.4% of Estonians live in urban areas; however, this
statistics is slightly distorted, as not all within the country migrants declare
the change in their living place.
4
Products with administered prices make up 16% of the consumer basket Larger share of adminis-
in Lithuania, and 14% in Latvia – well above Estonia and the euro area tered prices in Latvia
average (about 11%). The list of administratively regulated prices differs and Lithuania…
somewhat among the countries. For instance, Estonia is less dependent
on natural gas than Latvia and Lithuania, as heating production in Estonia
is mainly oil shale based (which is locally produced), while in Latvia and
Lithuania mainly natural gas is used.

3
For instance, for pensioners in Lithuania, the share of these products in the consumer
basket is about 67%; in Latvia, about 62%.
4
Administrated (administratively regulated) prices are those that are set/ approved/ moni-
tored by the local or state authorities, mostly in sectors with natural monopolies, e.g.,
prices of energy, public transportation, health and education, post, railways, etc. An inde-
pendent state institution in each country is responsible for regulation of these prices. In
Latvia, these are energy (gas, electricity, and heating), telecommunications, water supply,
post, and railway. In Lithuania, institutions regulate energy, water, and public transporta-
tion, and, in Estonia, energy, water, railways, and electronic and postal communications.


On the one hand, the larger share of administratively regulated prices in
Lithuania and Latvia means higher level of state intervention; on the other … implies larger influ-
hand, price regulation must ensure higher consumer protection, at least ence of local authorities
in theory. This also means that Lithuania should have more levers than on inflation.
Latvia or Estonia to control inflation, at least in the short term. But in prac-
tice it does not always guarantee lowest prices. For instance, the sole
natural gas supplier to Baltic countries Gazprom kept the delivery price
for Lithuania unchanged in 2011 (arguably because of a conflict due to
Lithuania’s recent plans to liberalise its gas market in line with EU energy
policy), whereas for Latvia and Estonia it was reduced by 15%.

3. Cyclical factors affecting inflation

The development of general economic situation and the stage of a busi-
ness cycle definitely influence price trends as well. During the three
stages of economic development in 2004-2011 (as outlined in Section 1),
inflation was supported by a combination of different factors. In the boom
years (2004-2007), inflation was mainly demand driven. Rising global
commodity prices in 2008 added to consumer price inflation in the Baltics
(supply factors). The following recession and demand contraction caused
prices to fall in 2009-2010. Currently, domestic demand is still weak and
inflation is largely driven by supply factors (see the next section).

Demand factors
Rising private consumption definitely supported consumer price growth in
Rising consumption dur-
2004-2007. As already outlined in Section 1, cheap and easily receivable
ing 2004-2007…
credit, together with excessive optimism about future incomes of house-
holds, was one of the factors that stimulated consumer demand and
made it easier for companies to increase their margins, which, in turn, af-
fected the overall price level.

Annual growth of credit stock and private consumption, %

75

50 Consumpt., EE

Consumpt., LV
Consumpt., LT
25
Credit, EE
Credit, LV
0
Credit, LT

-25
2004 2005 2006 2007 2008 2009 2010 Source: Reuters

The overheated labour market due to the booming local economies and
the opening up of labour markets after the Baltic countries joined the EU
in 2004 (i.e., emigration to the old member states) resulted in labour de-
mand sharply exceeding quality labour supply. In competition for labour,
companies were outbidding each other, pushing wages above productiv-
ity, which increased overall wage expectations. Households’ ability to
spend improved, which put additional pressure on inflation. For instance,
in 2004-2008, real gross average wages grew by 57% (while average la-


bour productivity by just 17%) in Latvia, 46% (23%) in Lithuania, and 39%
(13%) in Estonia. 5

With the collapse of economic activity in 2008-2009, unemployment rock- … a dramatic fall in de-
eted, wages declined, and consumer pessimism replaced the previous mand in 2008-2009
optimism; meanwhile, households needed to repay their loans. House-
hold purchasing power decreased dramatically, putting downward pres-
sure on wages – with a lack of demand, firms tend to lower prices to keep
those few consumers who are still willing to spend. In Estonia, prices
were decreasing in annual terms from June 2009 until February 2010. In
Latvia, the period of deflation was from October 2009 until August 2010,
while the shortest period of deflation was in Lithuania – only three months
at the beginning of 2010.

Nominal gross wage annual growth, %

40

30

20 Estonia

Latvia
10
Lithuania
0

-10

-20
2004 2005 2006 2007 2008 2009 2010 2011 Source: Reuters

Supply factors
Wage growth during the boom years affected firms’ production costs – Increase in labour costs
given the widespread optimism engendered by productivity and wage was transferred to con-
convergence with the old member states and booming consumption, ris- sumer prices in boom
ing labour costs were easily passed onto consumers. However, such a years.
swift and sustained increase in costs eroded the external competitiveness
of local producers – see, e.g., Benkovskis et al (2009). In Latvia, the
wage increase in 2005-2007 was higher than in the other two countries,
indicating that this increase might have put more pressure on consumer
prices in Latvia than in Estonia and in Lithuania (thus explaining higher
inflation rates and then deeper deflation in Latvia; see the next section).

5
It should be taken into account that average labour productivity had already started to
fall in 2008 in Estonia and Latvia due to the decline in economic activity (in Lithuania,
the fall began in 2009).


Difference between real gross wage and real average labour productivity annual
growth rates, pp

20

10
Estonia

Latvia
0
Lithuania

-10

-20
2004 2005 2006 2007 2008 2009 2010 2011 Source: Reuters

All three Baltic countries are small and open economies, with fixed ex-
Some of the inflation has
change rates; this makes them extremely open to developments in for-
eign markets. If a global shock occurs (e.g., in commodity prices), it will been imported.
feed through import prices into local consumer prices. For instance, the
substantial increase in global commodity prices (especially oil) in 2008
affected import prices in all three countries and, through that, consumer
prices. 6 Higher global commodity prices have not only direct effects, like
an increase in prices of fuel, but also indirect effects, e.g., a rise in hous-
ing tariffs (e.g., gas and heating), which are usually linked to oil price de-
velopments. Benkovskis et al (2009) show that the largest changes in
administrated prices indeed accrue from changes in energy prices.

Global commodity prices, 2005=100

300 150

Total
250 120
Food

200 90 Non-food
agriculture*
Metals
150 60
Crude oil (Brent),
100 30 USD (rs)

* cotton, timber, w ool,
50 0 rubber, oils, hides
2005 2006 2007 2008 2009 2010 2011 Source: Reuters Ecowin

In 2004-2008, inflation was also supported by tax harmonisation with the Tax harmonisation with
EU (e.g., gradual increases in excise tax rates on tobacco, alcoholic bev- the EU added to inflation
erages, and fuels). Tax hikes were also transferred by wholesalers and in the Baltics.
retailers to consumer prices.

6
Lithuania differs a bit from Estonia and Latvia, as it has the Mažeikiu Nafta oil refinery
plant. Therefore, the share of oil products in Lithuania’s import prices is larger, which
means that its import prices are more vulnerable to changes in oil prices in the world mar-
ket. However, the effect of this on the HICP is very small.


During the crisis years, wages were reduced (see Section 1), and enter- During recession, pro-
prises tried to raise effectiveness and productivity. The decrease in la-
duction costs were re-
bour costs allowed many firms to decrease prices as well. Global com-
duced, and profit mar-
modity prices also fell, thus diminishing prices of imported inputs. The
price decrease would have been much deeper, but the governments de-
gins squeezed.
cided to increase their melting revenues by raising taxes (VAT, excise,
income tax, etc). These were at least partially transferred into consumer
prices – as the domestic demand was very weak and households ex-
tremely sensitive towards the price increases (especially of necessities),
7
the companies were forced to squeeze their profit margins as well.

4. Current inflation trends: is there a cause for
concern?

Despite the ongoing deleveraging and still high unemployment rates,
which undermine consumer spending and thus put downward pressure Demand factors are still
on prices, inflation rates are again rising in all three Baltic countries. In very weak.
April 2011, annual inflation reached 5.4% in Estonia, 4.4% in Latvia, and
4.3% in Lithuania. 8 Inflation in Estonia accelerated well before it did in the
other Baltic countries; this can partly be explained as an attempt by busi-
nesses and households to pre-empt the euro effect. 9 Accession to EMU
increased household expectations and consumption, which could have
caused some demand-driven inflation. Furthermore, facing somewhat
stronger demand in the second half of 2010, producers and retailers in
Estonia may have been expecting scrutiny after January 1, 2011 and
raised some prices in advance.

Annual growth of consumer prices, %

20

16
EA
12
EE
8 LV
4 LT
HU
0
PL
-4

-8
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat

One of the (supply) factors behind price growth in all three countries is
Part of inflation is im-
developments in world commodity markets; for instance, global food
prices have already exceeded their previous peak in 2008. Still, compar-
ported.
ing HICP developments across Europe, it can be seen that price growth
is somewhat higher in the Baltics and CEE countries than in the euro
area.

7
It is hard to say, though, how big the pass-through was – while in 2009 and early 2010,
consumer prices might have risen less than taxes increased, in late 2010-early 2011 the
opposite might have been the case (most likely owing to higher inflation expectations).
8
In May 2011, annual growth of national consumer prices reached 5.4% in Estonia, and
5% in Latvia and Lithuania (harmonised consumer price indices are not available yet).
9
Estonia joined the euro zone on 1 January 2011. The official decision on this was made
by the EU authorities in July 2010.


It should also be considered that the tax changes in 2010 and early 2011
also influenced current annual price growth. A closer look at annual Part is due to tax hikes.
growth in prices at constant tax rates (i.e., disregarding the impact of tax
changes on consumer prices) 10 indicates that inflation in Latvia is much
lower (just 2.8% vs. 4.1% in March). This is due to the January 2011
changes in VAT and excise tax rates. As there were no major changes in
consumption taxes this year in Lithuania and Estonia, their inflation net of
taxes is almost the same as the usual HICP inflation (in Estonia, only the
excise for tobacco was raised, first in early 2010 and again in 2011).

Annual growth of consumer prices (constant tax rates), %

20

16
EA
12 EE
LV
8
LT
4 HU
PL
0

-4

-8
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat

A closer look at the main product groups of the consumer basket reveals
that, currently, consumer price inflation is mainly driven by food, housing,
and transport prices (especially in Latvia and Lithuania). Although there
are differences in the growth rates of prices for transport and housing be-
tween the Baltic countries and the euro area, these differences are not
unusually big. For instance, the annual growth of fuel prices in April 2011
was 17.6% in Latvia (partly explainable by excise tax hikes), 11 15.6% in
Lithuania, 14.6% in the euro area, and 10.5% in Estonia (due to an earlier
more rapid rise in the first half of 2010). The annual growth of housing re-
lated prices was 7.3% in Latvia (partly explained by VAT changes for
electricity, gas, and heating), 6.3% in Lithuania, 5% in the euro area, and
4.1% in Estonia. However, the largest differences in inflation rates are
observed for food prices, which is a topic of the next section.

Contribution to annual inflation in the first quarter of 2011, pp

LT

LV Food

Housing
EE
Transport

Other
EA

EU27
Source: Eurostat,
-1 0 1 2 3 4 5 6 Swedbank calculation

10
This indicator reflects the theoretical influence of a change in the VAT and excise tax
rates (i.e., assuming a full pass-through on prices and no second round effects).
11
Unfortunately, Eurostat does not provide data on HICP at constant tax rates for particu-
lar product groups.


5. Current inflation trends: food inflation is
disquieting

In April 2011, food prices in Estonia were 12.2% higher than a year ago; Higher food inflation in
in Latvia and Lithuania, 9.9% and 10.3% higher, respectively. These in- the Baltics than in
creases are much higher than in the euro area (2%), albeit similar to such EU27…
Central and Eastern European countries as Hungary and Poland.

Annual growth of consumer prices (food and non-alcoholic beverages), %

24

20
EA
16
EE
12 LV
8 LT
HU
4
PL
0
-4

-8
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat

Demand remains weak in all three Baltic countries due to the still-high … mostly due to supply
unemployment and slow rise in wages; for instance, annual growth of re-
factors
tail trade turnover of food items is still negative in Latvia and just about
1% in Estonia and Lithuania (at constant prices). Emigration flows also
undermine private consumption since a shrinking population demands
less. This implies that supply factors are leading to food price growth. As
was shown above, global commodity price growth certainly plays a role;
however, the extent it influences consumer price inflation differs across
countries. Moreover, price developments differ for various food items. To
understand what is behind the more rapid growth of food prices in the
Baltic countries vs. that in the euro area, it is important to examine micro
factors (i.e. characteristics of particular industries) that might affect con-
sumer prices.

Annual growth of retail trade turnover – food, beverages, and tobacco
(constant prices), s.a. %

30

20

10 EA

EE
0
LV
-10 LT

-20

-30
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat

Annual price growth for meat products is much lower than for food on av- Price of meat products
erage, both in the Baltics and in the euro area (although somewhat more still lower than two years
rapid in Estonia). Meat product prices in Estonia, Latvia, and Lithuania
ago; growth rates are
are still lower than two years ago (i.e., the peak). This can be explained
partly by the fact that it is a more expensive good, which can be given up similar to euro area.


if incomes are under pressure. Meat also has shorter due dates and can-
not be kept for long. Its price mainly depends on the price of grains,
which are the main source of nutrition for livestock, and labour costs.
While grain prices surely were rising, producers were also cutting their
labour costs. Another issue is regional competition – for local consump-
tion, pork (which is the most popular meat) is often imported, Meanwhile,
local producers mainly export their meat to Russia, as they find it difficult
to compete with cheaper imported products at home.

Annual growth of consumer prices (meat), %

24

20
16 EA
EE
12
LV
8
LT
4 HU
0
-4

-8
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat

Prices of bread and cereals, on the other hand, have already surpassed Prices of bread and ce-
previous peaks, particularly in Estonia and Lithuania. Annual inflation in
reals already exceed pre-
this sector in April 2011 was much more rapid in the Baltics than in the
euro area (2%):14.3% in Estonia, 7.1% in Latvia, and 12% in Lithuania. vious peaks; growth rates
Prices of bread and cereals in the Baltics follow quite closely global grain are higher than in euro
price developments. However, grains and wheat are not the largest cost area.
position for bread producers – the share of labour, energy, and logistics
costs is bigger. Still, the fact that Baltic producers seem to be much more
affected by global grain price developments than European producers on
average is a bit puzzling. It may be the case that, while retailers in the
Baltics transfer the increase in producer prices straight to consumers,
European retailers take part of the price increase on themselves. Another
possibility is differences in contract setting between farmers, producers,
wholesalers, and retailers – how flexible/rigid are the terms with respect
to changes in input prices as well as the length of contracts. These issues
require additional micro-level research, which is out of this paper’s scope.

Annual growth of consumer prices (bread and cereals), %

35
30
25 EA
20 EE
15 LV
10 LT
5 HU
0
-5
-10
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat


Grain prices in Europe, EUR/t

600

500

400
Rapeseed
300

200 Milling w heat

100

0
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: FOB W-Europe

Dairy product inflation poses the biggest conundrum. In April, prices of
milk, cheese, and eggs in Lithuania exceeded those of a year earlier by The most rapid price
14.6%. Corresponding prices in Estonia rose by 15%, and in Latvia by a growth for dairy prod-
staggering 21%. These rates by far exceed the annual inflation of these ucts, exceeding previous
products in the euro area (2.3%). No other country in the EU has double- peaks in Latvia and
digit inflation of dairy products; the next biggest inflation is in Bulgaria, Lithuania, after swift de-
where prices are 9.4% higher than a year ago. Of course, it should be clines of 2009
taken into consideration that this rapid growth in dairy prices in the Baltics
follows a period of swift price declines. However, dairy prices in Latvia
and Lithuania have already exceeded their peaks of early 2008, and in
Estonia have nearly reached it.

Annual growth of consumer prices (milk, cheese, and eggs), %

40

30
EA
20 EE
LV
10
LT
0 HU

-10

-20
2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat

At the same time, the dynamics of raw milk price developments are much Raw milk prices still be-
more similar across Europe. In addition, the peak price levels of early
low previous peaks
2008 have still not been reached. Of course, price levels differ across
countries, as they depend on the size and concentration of dairy markets
and regional competition, as well as purchasing power. In the Baltics, Es-
tonian and Latvian farmers enjoy somewhat stronger pricing power than
those in Lithuania, as there is a bigger share of larger farms in these two
countries. Another factor that significantly influences raw milk prices in
Latvia is the strategy of Lithuanian dairy producers, who buy a large
share of available Latvian raw milk (by offering more attractive prices
than Latvian dairy producers), process it in Lithuania, and then sell part of
the final production back to Latvia at lower prices than Latvian producers
can afford.


Raw milk price, EUR/100kg

45

40

35 Italy

30 Germany
Lithuania
25
Estonia
20 Latvia

15

10
2005 2006 2007 2008 2009 2010 2011 Source: CLAL

One of the reasons why Lithuanian producers are able to do this is that Consumer dairy prices
they enjoy larger economies of scale and have greater market power. depend on producers…
Lithuania is definitely a leader in the Baltics, based on the turnover of
dairy processing companies. There is also the largest concentration in
Lithuania – the top four dairy producers constitute about 80% of the mar-
ket. The market is most fragmented in Latvia, where the top four dairy
producers form just about 60% of the market; meanwhile, in Estonia, this
group accounts for about 64%. 12 Furthermore, in Latvia, capacity utilisa-
tion is lower than in Estonia and Lithuania, 13 implying inefficiencies in
production. In Estonia, an additional factor that drives prices up is the
ability of dairy producers to charge higher prices in the local market (as
imports constitute a small share of consumption) – the recent pickup in
demand from Russia has allowed Estonian dairy producers to increase
prices for exports and also motivated them to ask for higher prices in their
local market.

Food prices depend not only on the pricing strategy and power of manu-
facturers, but also on those of retailers. The retail market is quite concen- … and retailers
trated in Latvia and Lithuania, but less so in Estonia. In Lithuania, the two
largest retail chains (Maxima and Palink) account for close to 60% of the
market; in Latvia, about 55% (Rimi Latvia and Maxima Latvia); and in Es-
tonia, about 43% (ETK and Rimi). 14 In Latvia and Lithuania, the two larg-
est retail chains gained market shares during the last years, thus enhanc-
ing their dominating position, while in Estonia the two largest lost ground
somewhat. In Latvia, all other players are very small (market shares of
less than 5% each).

In the case of Latvia, recent discussions in the media and a review by the There are indications
Latvian Competition Council 15 suggest that retail chains is the most im- that retailers might be
portant and often the only possibility to distribute locally produced prod-
exploiting their dominant
ucts; retailers thus exploit their bargaining power and impose discounts
on producer prices, which producers have to accept as they lack an al-
position in the market,
ternative way to sell their production in the local market. The Competition especially in Latvia.
Council also concludes that retailers might actually gain additional profits
by passing through the increase in commodity and producer prices fully
to consumers, since retailers’ markup is usually defined in percentage
terms. In Lithuania and Estonia the situation may be better since there
are more local retail chains; however, a similar cost pass-through issue
exists.

12
Data from annual reports of companies and national statistics.
13
Industry analysts’ estimates suggest that capacity utilisation of milk manufacturers is
about 50-60% in Latvia, while close to 80-90% in Estonia and Lithuania.
14
Data from annual reports of companies and national statistics.
15
Latvian Competition Council (2011).


A recent study by the Bank of Estonia shows that the increase in dairy There are cases when re-
prices for consumers in Estonia was larger than explained by input price tailer prices are raised
developments. 16 Also, the Lithuanian Competition Council in autumn more than justified by in-
2010 concluded that increase in prices of raw materials did not alone ac- put price growth.
count for the rise in certain food products. The Latvian Competition
Council claims that, although, in the majority of cases, dairy and bread
price increases of producers and retailers are symmetric, there were
cases when retailers were increasing final prices to a larger extent than
producers. 17 When domestic demand is weak (as it currently is) and if
competition is high, one would expect that prices of producers and retail-
ers should absorb part of the input price increases, and that final prices
should not rise to the same extent.

Overall, in these areas, we have more questions than answers. More mi-
cro level data are necessary, which we do not have access to, in order to
draw conclusions. However, there are hints that regional competition as-
pects, as well as possibly inadequate domestic competition, have played
a role in food price developments.

5. Room for improvement in product market
competition

Research supports the relationship between product market competition
(usually proxied by markups) and inflation, although there are different
Stronger product market
opinions on whether this relationship is long-term or short-term. There are competition curbs infla-
studies showing that stronger product market competition leads to a per- tion pressures…
manently lower inflation rate, see, e.g., Cavelaars (2002), Przybyla and
Roma (2005), but also some concluding that the intensification of compe-
tition is a temporary means of curbing price increases and competition
loses its explanatory power for inflation rates when longer time spans are
considered, e.g., Janger and Schmidt-Dengler (2010).

The economic literature also points to the importance of competition in … and eases labour mar-
product markets for easing labour market pressures. Namely, the less ket imbalances.
competitive are product markets, the more depressing is the effect on la-
bour reallocation because of less dynamic firm entry and exit (OECD,
2010). Taking into account sizeable structural unemployment in the Bal-
tics, labour reallocation is one of the crucial factors that might help to
ease potential imbalances building up in the labour market that may oth-
erwise spill over into excessive wage growth and then into inflation. 18

As it was shown above, there are some indications that competition prob-
lems in food processing and retailing might be one of the factors behind
the more rapid price growth in the Baltic countries. These indications cer-
tainly call for more detailed research. For instance, the Global Competi-
tiveness Report by the World Economic Forum suggests that domestic
competition in all three Baltic countries has worsened recently relative to
other countries. Estonia scores better that Latvia and Lithuania.

16
Lindpere et al (2011).
17
Latvian Competition Council (2011).
18
See our Swedbank Analysis (2010), “High unemployment in Latvia – is it here to
stay?” for more details.


Extent of domestic competition, rank out of 139 countries
(1 is the best-performing country)

120 -13 change in rank
-17 -16
-13 2009 -2010
100
-17 -5 -15
80 -13
EE
60 -11
-9 5
40 -5 LV

20 LT
0
competition

dominance
competition,

Intensity of

Effectiveness
Extent of
Domestic

market

monopoly
of that

local

of anti-

policy
Source: Global
Competitiv eness
Report, 2010-2011

Competition authorities have become more active recently in monitoring
product markets (especially in Latvia and Lithuania) and inviting produc- Competition authorities
ers to complain if they face unfair terms and conditions in their contracts in the Baltics have be-
with retailers. In Lithuania, a web portal was created where consumers come more active.
can see maximum, minimum, and average prices for the most important
food items in the retail network (updated each week). There have been
cases in Latvia recently in which the Competition Council imposed fines
on the two biggest retail chains for abusing their dominant position (e.g.,
one in late 2010 regarding the dairy industry and another in January 2011
regarding the bakery industry).

Profit margins 19 of retailers and manufacturers have widened over the
last year. 20 In Estonia and Lithuania, these groups managed to retain
Profit margins have wid-
positive profitability throughout the recession. Of course, an increase in ened.
profit margins does not necessarily imply a reduction in competition or an
increase in prices of final production – companies need to regain profit-
ability after a crisis when the profit margins were in most cases squeezed
below sustainable levels. Still, profit margins in manufacturing have al-
ready approached the levels of 2006-2008 in Latvia and Lithuania (data
for 2010 for Estonia are not available).

Profit margins, %
10
EE LV LT
8
6

4 Manufacturing

2 Domestic trade

0
-2
-4
9M 2010

9M 2010
2006-07
average
2008

2009

2006-07
average
2008

2009

2006-07
average
2008

2009

Source: ESA, Bank of
Latv ia, LDS

19
Calculated as a profit before tax divided by a turnover.
20
It should be taken into account that a large part of manufacturing output goes to export
markets, where the margins could be higher and the average margin in manufacturing is
likely to exceed that in domestic market.


6. Inflation outlook

One of the forward-looking measures (or leading indicators) that might
help to forecast inflation is inflation expectations. The idea behind this is
as follows: if households believe that prices will grow faster in the near
future, they might cut back their future consumption and increase current
consumption. When households believe that prices will rise, they are
more ready to accept higher prices; this makes it easier for businesses to
increase their final prices.
21
According to a consumer confidence survey, the share of consumers
Inflation expectations
who think that prices will continue to rise in the next 12 months has risen
have risen.
in all three countries. Inhabitants see that prices are increasing and tend
to believe that they will rise in the future as well (i.e., adaptive expecta-
tions).

Price expectations over next 12 months, points (balance of answers)
100

80
60
Estonia
40
Latvia
20
Lithuania
0
Euro area
-20
-40

-60
2004 2005 2006 2007 2008 2009 2010 2011 Source: DG ECFIN

Our recent analysis using Granger tests 22 show mixed results on the link-
ages between inflation expectations and actual inflation. In the case of
Estonia, the test shows that actual inflation is the explaining factor of in-
flation expectations (a similar result is presented in Benkovskis et al
(2009)), which might, in turn, mean that expectations in Estonia are
mostly a backward-looking phenomenon. In the case of Latvia, the results
show no clear direction of causality – both variables include information
about the other. In the case of Lithuania, expected inflation describes the
movements of actual inflation. Therefore, one may conclude that the rela-
tionship between inflation expectations and inflation differs across coun-
tries. Inflation expectations certainly cannot be used as the sole leading
indicator to forecast inflation; other cyclical and fundamental factors, de-
scribed above, should also be taken into consideration. However, rapidly
growing inflation expectations (similar to the pre-crisis years) should defi-
nitely be taken seriously.

21
Data from DG ECFIN.
22
See Swedbank discussion paper, to be published in June 2011. Granger causality tests
examine whether information in one variable helps to predict the other (i.e., they may not
indicate a strong one-way relationship or the direction of the influence). Monthly data
from 1997 till 2011 are used. Test results are available upon request.


We expect prices and productivity to continue to converge in all three Bal- Inflation rates to peak
tic countries with that in the advanced EU economies, and a mix of sup- this year
ply and demand factors to drive inflation in the nearest future. We are of
the opinion that annual inflation in all three Baltic countries will peak this
year. It should be emphasized that we do not see a risk of uncontrolled,
runaway inflation; however, we do see certain risks that might cause a
more rapid inflation than our base scenario assumes.

The influence of demand-side factors is still very weak, although eco- Demand-side factors will
nomic recovery is on the way in all countries. In the first quarter of 2011, become more important
Estonia’s GDP was 8.5% higher than a year ago, Lithuania’s GDP rose in the near future...
by 6.9%, and Latvia’s by 3.5%. Labour markets are slowly improving, as
are consumer expectations (wage expectations are rising, and fear of un-
employment decreasing), and consumer spending is expected to grow
slowly. At the same time, deleveraging and growing consumer prices are
hindering households’ willingness to spend. Banks have become more
conservative in issuing loans than in the boom years but willingness to
lend is gradually improving. The outlook for the next two years has im-
proved, and the impact of demand-side factors will gradually grow as all
three economies continue recovering (a bit slower in Latvia than in Esto-
nia and in Lithuania).

Supply-side factors will also play a significant role. The main one is global … but supply-side factors
prices of commodities and energy, especially as food, transport, and will still play a role.
housing constitute a large share of consumer expenditures. We expect oil
and food prices to grow much more slowly next year, partly owing to the
slowdown in emerging economies; 23 however, the uncertainty with regard
to this forecast is high. Labour costs will also grow, thereby increasing
production costs, but this growth, at least for now, is expected to be slow.

We anticipate inflation rates to fall somewhat in 2012: in Estonia, from
3.8% this year to 3.2% next year; in Latvia, from 4.2% to 2.6%; and, in Inflation rates to fall next
Lithuania, from 3.2% to 2.5%. These are April 2011 forecasts, and it is year, but there are risks
likely that we will revise our 2011 forecast upwards somewhat in August. to this forecast.
This is our base scenario, which is, however, prone to several risks (es-
pecially on the supply side):

• There is a concern that imbalances might build up again in the
labour markets. For instance, wages were already growing in line
with productivity in Estonia and Latvia in the first quarter of this
year (see the graph on page 9). In an environment of free labour
mobility (and wages in the advanced EU countries that are sig-
nificantly higher than those in the Baltics), growing economies
(which will need larger labour forces), and poor labour supply
(due to emigration, structural unemployment, aging populations,
and lack of immigration policies), there is a risk that labour de-
mand in the Baltics will significantly exceed the labour supply,
and, consequently, that wage growth will exceed that of produc-
tivity. Especially taking into account that it will be impossible to
hold up such swift productivity growth rates as in the beginning of
recovery period – it can be seen that productivity growth is al-
ready slowing. Of course, given the recent experience, both fiscal
policy and bank lending in the foreseeable future will be more
conservative and will not support a buildup of such imbalances as
in 2005–2007; nevertheless, it seems that the labour market may
still be vulnerable to the same old ills that spurred inflation previ-
ously.

23
See Swedbank’s latest Energy and Commodities: May 16, 2011, April 15, 2011, as well
as Swedbank Economic Outlook, April 2011


• There is a very high uncertainty with regard to global commodity
price developments. It is hard to predict how the political situation
in the Middle East and North Africa will evolve, or what will hap-
pen with agricultural production (weather conditions, protection-
ism risks, etc.). A more rapid global price growth would result in
more expensive imports in the Baltics and, thus, higher consumer
prices.
• Domestic competition might become a more serious problem.
There is a risk that, given the opportunity to raise prices (which,
with the rising inflation expectations, is likely), retailers may aim
to return to profit margins seen in the boom years more quickly
than economic fundamentals would justify.

It can be seen that, for Latvia and Lithuania, the 2012 inflation forecasts
24
are already on the margin of not fulfilling the Maastricht criterion, imply- Policy action is needed
ing that close monitoring of price developments is necessary and that the to curb inflation.
authorities should step in to ensure that the countries actually introduce
the euro in 2014. This stepping in should not be seen as a one-off ma-
nipulation, as this would not be perceived as sustainable and would not
help to fulfil the Maastricht criterion. In Estonia, the more topical issues
related to the relatively high inflation rates are external competitiveness
and social cohesion. The next, and concluding, section thus makes policy
suggestions to local authorities for reducing inflation rates.

7. Policy options: what to do and not to do to curb
inflation
Undoubtedly, the recent rise in inflation in Estonia, Latvia, and Lithuania
to a large extent has been driven by commodity price growth in the world
markets, which local authorities, businesses, and households cannot
influence. However, there are also domestic issues that can and should
be addressed – by doing so it is possible to reduce price pressures.

There are three policy areas in which action can be taken to address the
inflation problem: monetary, fiscal, and structural policies. By altering
bank reserve requirements, adjusting interest rates, and raising public
awareness of the issue, a central bank can affect inflation and its
expectations. However, given the existing exchange rate regimes,
monetary policy is largely exogenous in the Baltic countries, having only
a very remote and indirect impact on inflation dynamics. Fiscal policy,
especially in Latvia and Lithuania, is constrained by the necessity to carry
on with budget consolidation – its main avenue to curb inflation is via the
deflationary effects of expenditure cuts and the clear communication of
future actions so as to reduce uncertainty and inflation expectations.
Thus, the most versatile and influential – but, unfortunately, also the most
complex and time-consuming – policy area is structural policy, which
extends over a wide range of fields: competition, corruption, labour
market, etc. To have a strong and lasting result on inflation, all three
policy areas must be explored concurrently.

One of the major issues is competition policy and the transparency of a DO: strengthen competi-
price formation mechanism. Strengthening competition, especially
tion and improve price
between retailers, would weaken their ability to raise profit margins and
pass cost increases on to consumers. Measures include strengthening transparency

24
12-month average inflation should not exceed the result of the three best-performing
EU countries (i.e., those with the lowest inflation) by more than 1.5 percentage points.
According to the autumn 2010 forecasts of the European Commission, this criterion could
be about 2.4% in 2012.


Competition Councils’ capacity to monitor the market’s micro structure in
order to identify abuses of the dominant position, easing entry of new
market players, and making it easier for consumers to compare prices
across shops (e.g., online weekly monitor of average, maximum, and
minimum prices of the main food items has been introduced in Lithuania).
Bringing competition into the public sector service provision (e.g., by
privatisation and/ or introduction of “money follows” schemes, like
students’ vouchers in Lithuania) is yet another solution.

The source of the problem should not be misunderstood, though. For
instance, in Lithuania, an outright regulation of mark-ups has been
proposed several times (especially when elections approach). Although
the setting markups is a must in administratively regulated sectors, it
would by and large be a mistake to try to enforce similar regulations in
the private sector – a well-designed and strong competition policy would
provide a more efficient, transparent and sustainable solution.

Another area where improvements can be made is by raising productivity DO: raise productivity
and cost efficiency. Whatever permits to cut costs will lower prices if and cost efficiency
competition is fierce. This certainly is in the companies’ competence, but
authorities can support and speed up this process by lifting administrative
barriers and encouraging a more effective and targeted acquisition of EU
funds. Given that energy costs have been particularly volatile and directly
(e.g., heating) and/ or indirectly (e.g., as food producers’ costs) form a
key part of HICP, improving energy efficiency in order to reduce energy
dependency should be one of the key objectives (especially since EU
funds support this objective). It also includes strengthening the capacity
25
of the regulatory authorities that oversee monopolies and the provision
of public services to set the lowest possible tariffs by being able to
carefully vet their cost structures.

The factor that has definitely added to inflation during the last two years is
tax hikes. Further government budget consolidation attempts in Latvia DO NOT: increase tax
and Lithuania must exclude tax burden increases (especially that of VAT burden
and excises) and centre on expenditure cuts and the eradication of the
shadow economy. Unfortunately, the shadow economy has expanded in
all three countries. This, however, does not preclude a rebalancing of the
overall tax burden by, for instance, reducing labour taxes to foster job
creation and compensating for this reduction by raising the real estate
tax. For instance, a decrease in labour taxes is planned in 2013 in
Estonia. A clear and timely communication of tax changes (or none of
them) is crucial to diminish consumers’ inflation expectations.

One of the measures recently discussed in the Latvian media to curb DO NOT: freeze wages
inflation is a wage freeze in the public sector (and possible agreements
with social partners to do the same in the private sector). We are of the
opinion that such a measure would clearly be counterproductive and
misplaced – inflation is driven predominately by supply-side factors, while
private consumption remains very weak. Furthermore, when wage growth
is justified by productivity gains (which is currently the case in the Baltics,
especially in the exporting sectors), wage growth controls in the private
sector with free labour market mobility would simply boost emigration and
push wages even higher, due to the lack of labour. It should be noted that
the current slow income growth is largely “eaten up” by inflation, and
households’ purchasing power is thus improving only marginally.

Yet, keeping a close track of labour market developments is important DO: improve labour
and should not be underestimated. To reduce the labour market risks market efficiency and
described in the previous section, reforms in labour markets must
sustainability
25
The Public Utilities Commission in Latvia, Regulatory Division of Competition Au-
thority in Estonia, and National Control Commission for Price and Energy in Lithuania.


deepen. To mention just a few of the major avenues for economic policy
action: cut structural unemployment by improving skills of job seekers
and support labour reallocation between sectors and regions (inside the
countries), discuss and design skills based immigration policies, and
promote the alignment of wage growth with that of the underlying labour
productivity.

Lija Strašuna
Mārtiņš Kazāks
Nerijus Mačiulis
Annika Paabut


Abbreviations
CEE – Central and Eastern Europe
DG ECFIN – European Commission's Directorate-General for Economic
EA – Euro area
EE – Estonia
EMU – European Monetary Union
ESA – Statistics Estonia
EU – European Union
HICP – Harmonized index of consumer prices
HU – Hungary
LDS – Lithuanian Department of Statistics
LT – Lithuania
LV – Latvia
PL – Poland

References
Benkovskis, K., Kulikov, D., Paula, D., Ruud, L. ”Inflatsioon Balti riikides”
[”Inflation in Baltic States”], Kroon ja Majandus 2/2009, Bank of Estonia
Cavelaars, Paul (2002), “Does competition enhancement have perma-
nent inflation effects?”, De Nederlandsche Bank Research report
Coudert, V. (2004). Measuring the Balassa-Samuelson effect for the
countries of Central and Eastern Europe? Banque de France Bulletin Di-
gest.
Ed. Lindpere, M. (co-authors Soosaar, O., Pungas, K., Lambing, M.)
“Kuidas Eesti toiduaineteturg turuosalisi teenib? Valik mõttearendusi”
[“How food market serves the market participants? Selection of lines of
reasoning”] May 2011, Bank of Estonia
Janger, Jürgen, Philipp Schmidt-Dengler (2010), ”The relationship be-
tween competition and inflation”, Monetary policy and the economy
Q1/10, Austrian Central Bank, p.53-65
Latvian Competition Council (2011). “Secinājumi par piena produktu un
maizes tirgu” (Conclusions about dairy and bakery markets),
http://www.kp.gov.lv/uploaded_files/KPPP085PienaSecinajumi.pdf (in
Latvian)
Lojschová, A. (2003). Estimating the Impact of Balassa-Samuelson Effect
in Transition Economies.
Mihaljek, D. and Klau, M. (2009). Catching Up and Inflation in the Baltics
and Southeastern Europe: the Role of Ballasa-Samuelson effect.
OECD (2010), “Moving beyond the jobs crisis,” OECD Employment Out-
look 2010, Chapter 3: Institutional and policy determinants of labour mar-
ket flows
Przybyla, Marcin, Moreno Roma (2005), Does product market competi-
tion reduce inflation? Evidence from EU countries and sectors, Working
Paper No. 453, European Central Bank


Economic Research Department

Sweden
Cecilia Hermansson +46 8 5859 7720 cecilia.hermansson@swedbank.se
Group Chief Economist
Chief Economist, Sweden

Magnus Alvesson +46 8 5859 3341 magnus.alvesson@swedbank.se
Senior Economist

Jörgen Kennemar +46 8 5859 7730 jorgen.kennemar@swedbank.se
Senior Economist

Anna Ibegbulem +46 8 5859 7740 anna.ext.ibegbulem@swedbank.se
Assistent

Estonia
Annika Paabut +372 888 5440 annika.paabut@swedbank.ee
Acting Chief Economist

Elina Allikalt +372 888 1989 elina.allikalt@swedbank.ee
Senior Economist

Latvia
Mārtiņš Kazāks +371 6 744 5859 martins.kazaks@swedbank.lv
Deputy Group Chief Economist
Chief Economist, Latvia

Dainis Stikuts +371 6 744 5844 dainis.stikuts@swedbank.lv
Senior Economist

Lija Strašuna +371 6 744 5875 lija.strasuna@swedbank.lv
Senior Economist

Lithuania
Nerijus Mačiulis +370 5 258 2237 nerijus.maciulis@swedbank.lt
Chief Economist, Lithuania

Lina Vrubliauskienė +370 5 258 2275 lina.vrubliauskiene@swedbank.lt
Senior Economist


Disclaimer
This research report has been prepared by economists of Swedbank’s Economic Re-
search Department. The Economic Research Department consists of research units in
Estonia, Latvia, Lithuania, and Sweden, is independent of other departments of Swed-
bank AB (publ) (“Swedbank”) and responsible for preparing reports on global and home
market economic developments. The activities of this research department differ from
the activities of other departments of Swedbank, and therefore the opinions expressed in
the reports are independent from interests and opinions that might be expressed by
other employees of Swedbank.
This report is based on information available to the public, which is deemed to be reli-
able, and reflects the economists’ personal and professional opinions of such informa-
tion. It reflects the economists’ best understanding of the information at the moment the
research was prepared and due to change of circumstances such understanding might
change accordingly.
This report has been prepared pursuant to the best skills of the economists and with re-
spect to their best knowledge this report is correct and accurate, however neither Swed-
bank nor any enterprise belonging to Swedbank or Swedbank directors, officers, or other
employees or affiliates shall be liable for any loss or damage, direct or indirect, based on
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Enterprises belonging to Swedbank might have holdings in the enterprises mentioned in
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prices of securities issued by them.
The research presented to you is of an informative nature. This report should in no way
be interpreted as a promise or confirmation of Swedbank or any of its directors, officers,
or employees that the events described in the report shall take place or that the forecasts
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We stress that forecasting the developments of the economic environment is somewhat
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IF YOU DECIDE TO OPERATE ON THE BASIS OF THIS REPORT, THEN YOU ACT
SOLELY ON YOUR OWN RISK AND ARE OBLIGED TO VERIFY AND ESTIMATE THE
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ENTLY.

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