Prices fell in April for almost half of the consumer basket

Data from Statistics Estonia show that inflation remained at 0.2% in April and prices in Estonia were the same as in the previous month. At the same time goods and services with falling prices accounted for around 45% of the consumer basket as fruit and vegetables joined other goods and services where prices were already in decline.

Harmonised consumer price inflation for the euro area increased to 0.7% in April and it is expected that it is exiting its recent trough. The state of the economy in the euro area and the outlook for the future have improved, but no major increase in inflation is expected even so. The forecast published at the start of this week by the European Commission puts inflation in the euro area at 0.8% for this year.

Estonian inflation was brought down by electricity prices more than anything else, as they declined by 7.4% over the year. However if the current electricity price is compared to the price in December 2012 before the electricity market opened, a rise of 16% in electricity prices for households can be seen. In January 2013 there was a rise of 24% in the price of electricity as the electricity market opened, and prices continued to rise rapidly in the following months so that they were 38% up on the previous year in June. The main cause of the sharp rise in prices was that electricity generation capacity in the Baltic states was smaller than electricity consumption. This changed in January 2014 thanks to a new electricity cable that made it more possible to import electricity from the Nordic market. The result was that the electricity price fell by 4.2% in the first quarter. The price was also pushed down by the warm winter and unusually low electricity consumption.

The highest inflation in April was in rents, which rose by 14% over the year. Rents have risen rapidly for three years now. They rose much more quickly than prices for sale and purchase transactions for residential properties in 2011–2012, meaning it was more profitable to buy real estate rather than to rent it. Growth rates equalised at the start of 2013 and at the end of the year property prices were rising faster than rents. The rise in rents was earlier driven by households being cautious about buying residential real estate and by high demand for rented properties, but in recent months the rises in property prices have started to have a larger impact on rent prices.

Although prices fell in April for unprocessed food, including fruit and vegetables, they rose by 2.0% for food products as a whole, including tobacco and alcohol. Food price inflation has accelerated on global markets and prices of coffee and sugar have risen the most. Global food prices have only passed into Estonian consumer prices modestly so far and the rise in alcohol and tobacco excise played a larger role in setting food price inflation at the start of the year.

Source: Bank of Estonia

Author: Rasmus Kattai, Head of the Economic Policy and Forecasting Division, Eesti Pank


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