OREANDA-NEWS. November 06, 2014. All countries preparing for the adoption of the euro fear an increase in prices, but Estonia and Latvia, which have already adopted the euro, did not experience the inflation to the feared extent, the fresh Baltic Household Outlook by SEB reveals.

“After the euro changeover, the price increase in Estonia was higher than in Latvia. However, a recent survey by the Bank of Estonia shows that this increase was caused by other factors and the euro played a rather modest role – based on various calculations, only up to a tenth of the entire inflation. The adoption of the euro mainly affected the price of goods that were significantly cheaper in Estonia as compared to other countries in the eurozone. Inflation had a greater effect in small shops, where the price of groceries went up more than in large supermarkets,” Triin Messimas, Development Manager of Private Loans at SEB, commented.

According to the Eurobarometer survey, in September, 84 per cent of the people in Lithuania believed that adoption of the euro will bring with it a price increase. Four months before the euro changeover, 81 per cent of the people in Estonia, and eight months before the euro, 75 per cent of the people in Latvia, feared that prices would increase.

“Although inflation remained low in Latvia, a continuous price increase is still perceived. The results of the survey showed that 87 per cent of the respondents were of the opinion that with the adoption of the euro, prices have increased, and 39 per cent of the respondents stated the price increase has been considerable. Before and after the adoption of the euro, general inflation was low in Latvia, except in the service sector where it was higher than the average. In August, compared to the previous year, the prices of hairdresser services (7 per cent), tourism services (5.9 per cent) and catering (5.2 per cent) had gone up the most. A price increase was also noticeable in the rental market for residential spaces. An increase in the price of services can partially be explained by the rounding off of the prices before the euro and during the period of changeover to the euro,” said Edmunds Rudzitis, SEB Latvia’s social-economy expert.

“Considering the trend of the past few months, the worry over the price increase may intensify in Lithuania. Regardless of the fact that most trade and service companies have promised not to increase prices upon adoption of the euro, some of them – especially in the services domain – have done this already, before committing to this promise and before the period when prices need to be shown in two currencies. Price statistics on consumer goods and services reveal that in Latvia, for example, a noticeable price increase started four months before the adoption of the euro; whereas in Lithuania, the same price increase already started in April, nine months prior to the arrival of the euro. It seems that Lithuanian companies have learned from the experiences of their neighbours – several of them have rushed to raise the prices before promising not to change prices upon adoption of the euro. However, as the prices in Lithuania have already gone up, there is reason to believe that further price increase will be moderate or non-existent. Based on official statistics, the effect of the euro on prices is rather small, but people probably perceive it as being greater than it really is,” Julita Varanauskiene, economist at SEB Lithuania, commented.

Various surveys have shown that even if people perceive a considerable increase in prices after the adoption of the euro, the actual change in prices has been only moderate. There are many reasons as to why consumers perceive the price increase as being greater than it actually is: it is difficult to convert prices from one currency to another; the amount of money at hand is perceived differently in different currencies; the majority of families compare the prices in euros with the prices of goods in the domestic currency before the adoption of the euro, even though these prices originate from several years back; before the adoption of the euro, people strongly anticipate a price increase; perception of price changes is intensified with the extensive coverage of the topic in the media and a decrease in the income of certain segments of the population.

Read the full Baltic Household Outlook, in English, here: www.seb.ee/BHO_okt_2014_esitlus and view the presentation here: www.seb.ee/BHO_okt_2014