| Abstract [eng] |
In the period from 1996 to 2004, inter-sector productivity growth differences (tradable versus non-tradable sectors) were bigger in the Baltic States compared to the euro area. Thus, the convergence in terms of inter-sector productivity growth structure was quite minor. At the same time, the higher growth in both sectors’ productivity suggests that there has been a strong convergence in productivity growth in the Baltic States relative to the euro area in terms of the productivity level. In line with developments in the euro area, sector wage growth differences were small in the Baltic States. At the same time wage growth in both sectors was much stronger than in the euro area. Thus, the findings suggest that the underlying assumptions for the Balassa–Samuelson effect are fulfilled. Accordingly, it can be expected that higher service sector inflation will contribute stronger to the overall inflation in the Baltic States compared to the euro area. According to the literature, the estimates of the Balassa–Samuelson effect in the Baltic States vary from zero to 2 percentage points per annum. Disregarding the inter-sector productivity growth differentials, it is important to remember that the overall demand pressure coming from the wage increases in the service sector spill-over also to the industrial sector inflation. However, it is very difficult to measure the exact impact of the Balassa–Samuelson effect on inflation. This applies mainly to the difficulties to isolate the Balassa–Samuelson effect from other factors influencing inflation. Moreover, there is no clear trend that inflation in non-tradable sectors exceeds that in the industrial sector since 1998. However, non-tradable sector inflation stayed above the tradable sector since 2005 in the Baltic States. Thus, when analysing the pass-through from productivity growth to inflation in the Baltic States, several caveats have to be kept in mind. The share of non-tradable goods in consumption is still significantly lower in the Baltic States than in the euro area. Thus, it limits the magnitude of the pass-through from the productivity growth to inflation in the Baltic States compared to the euro area. Moreover, the Balassa– Samuelson effect will tend to be smaller in small open economies such as the Baltic States, as the share of tradable goods in consumption is relatively high. Factors other than the inter-sector productivity gaps contributed to the higher inflation in the non-tradable sector in most of the Baltic States from 1998 to mid 2004. For instance, an increase in the administrated prices, which cover a significant share in consumer price indices in the Baltic States and are mainly concentrated in the service sector, contributed significantly to the increase in the price of nontradables. The recent administrative price changes were the increase in heating costs in the Baltics due to the imported gas price increase mainly during the last year. Also, the change in the structure of demand might have been an important factor, as the demand for services tends to increase as real income rises. In this context, it is important to note that administered prices are typically concentrated in the non-tradable sector. Moreover, price liberalisation has contributed directly to the increase in the price of non-tradables. Nevertheless, the price level, most particularly in the non-tradable sector, is still considerably lower in the Baltic States compared to the euro area. |
