Estonian Entrepreneurs’ and Consumers’ Price Expectations Marje Josing ; Evelin Ahermaa November 2005

Key words Joining the EU Entrepreneurs’ price expectations Price Indices - changes

Price Changes – Entrepreneurs’ Plans (1) (next 3 months, BTS balances) Increase Decrease

Price Changes – Entrepreneurs’ Plans (2) (next 3 months, BTS balances) Increase Decrease

Price Changes – Manufacturing Increase Decrease r=0,74

Price Changes – Construction Increase r=0,69

Factors Limiting Building Activity (% of enterprises)

Price Changes – Retail Trade Increase r=0,42 Decrease

Conclusions Entrepreneurs’ planned to increase prices in connection with joining the EU Price increase was accelerated before and stabilized after joining the EU

Consumers expectations Inflation is historically very important and sensitive problem for Estonian consumers Inflation perception evaluating strongly consumers household and general expectation Consumers inflation expectations are weakly connected with purchasing expectations

Consumer price index (%, compared with last year) *prognoses

Consumers price expectations and prognoses of households and general economic situation

Consumers price expectations and prognoses of major purchases (balances)

Inflation and joining with the EU Joining with European Union increased inflation in Estonia Before joining the question of prices was the most interesting and critical problem for Estonian consumers. Estonia joined with EU in May 2004. In April 2004 consumers expected that over the next 12 months Estonian prices will be 19,7 % higher (real HICP was 3,7%).

Consumers evaluations of prices over the last 12 months and HICP Balance HICP Prices increase Prices decrease Joining with EU r =0,72

Consumers prognoses of prices over the next 12 months and HICP Balance HICP Prices increase Shift 12 months Prices decrease Joining with EU r = 0,45

Consumers prognoses of prices over the next 12 months and HICP Balance HICP Prices increase Shift 7 months Prices decrease Joining with EU r = 0,68

Consumers price expectations (%) and real HICP (%)

Euro Estonian government have a plan to join with euro-zone from 1-st of January 2007. Main problem for Estonia - Maastricht agreement’s inflation criteria. Estonian economy needs price convergence with EU market and Estonian fast economic development fosters inflation (real increase of GDP was 7,8% in 2004).

Price level indices of GDP (2002, PPP, EU15=100)

Change of GDP in Estonia (at constant prices, compared with previous year, %)

HICP and Maastricht criteria (%, Oct. 2004-Sept HICP and Maastricht criteria (%, Oct. 2004-Sept. 2005, 12 months avarage) Criteria = 2,45