Wage growth may hinder inflation slowdown

According to Statistics Estonia, the price level increased 0.3% in April 2012 compared to March and inflation slowed to 4.0% compared to April 2011. Eurostat’s flash estimate shows that euro area inflation was 2.6% in April.

Estonia’s domestic demand has been rather resistant to the languishing external environment. Retail sales volumes soared at the start of the year. This was supported by the notable improvement in the labour market situation over the past year and the continuation of wage growth in recent months. Looking at core inflation, the inflation of the services, where labour costs make up the majority of expenditure, accelerated along with wage growth.

The price of food grew 0.5% in April, mostly due to the price shocks of some single goods groups. Price changes of food commodities in the global market have not added to inflation recently.

Energy price pressures eased somewhat in April and the global-market price of crude oil declined by about 3% (in euro) during the last two weeks of the month. However, the share of motor fuels in Estonia’s inflation was 0.1pp, month-on-month.

Pressures deriving from the labour market play an important role in future inflation developments. If the rapid wage growth does not slow, it may prevent inflation from slowing as well.

Author:  Martin Lindpere, Eesti Pank, economist

Source: Bank of Estonia

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