Inflation fell close to zero in May

Data from Statistics Estonia show that inflation in Estonia slowed in May to 0.1% over the year, and prices were also up 0.1% on April. The low rate of inflation was caused by both domestic and external factors, though the main driver was a fall in import prices. The harmonised index of consumer prices for the euro area showed inflation slowing to 0.5% in May, which is about the same as in Estonia. Estonian consumer price inflation differs from the harmonised index of consumer prices mainly as a consequence of purchases by tourists, which have a higher share of food products and smaller share of energy.

Energy prices in May were lower than a year earlier, but the fall was smaller than that in April because the fall in motor fuels prices stopped after more than a year and the fall in electricity prices was also smaller than that in April. Although energy prices did not fall by as much as they did before, this did not push inflation up as the price of the food basket grew more slowly at the same time. Food price inflation mainly slowed for unprocessed food, particularly fruit and vegetables, which fell in price.

The slowdown in inflation meant that growth in real wages accelerated in the first quarter to 6.6%, which indicates that consumer purchasing power improved significantly. Manufactured goods have become cheaper for consumers, particularly through a slowing of inflation in prices for clothes and footwear, and retail sales volumes grew by 8% in April. However, slower inflation is not clearly evident yet for consumers. Data from the Estonian Institute of Economic Research show that 33% of people felt that prices were rising fast and only 9% perceived prices as stable or falling. In the euro area 17% noticed prices rising in May and 27% saw them as stable or falling.

The unusually low inflation in Estonia right now is a temporary phenomenon, and prices will rise faster in the second half of the year. Inflation will be raised as the effect of free higher education passes out and energy prices continue to fall more slowly. The acceleration in inflation will remain subdued because the ability of businesses to raise prices is limited as demand in foreign markets will recover only gradually and price growth abroad will be slow.

Source: Bank of Estonia

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

Estonian inflation stays low

In May, consumer prices in Estonia increased by 0.1% compared with last year and also last month. Regulated prices rose by 0.3% within a year. Non-regulated prices did not change.

Biggest push came from an increase in the prices of alcohol and tobacco that were lifted by higher excise taxes. The government plans to increase alcohol excise tax also next year. The planned 15% increase in the tax rate next year would raise inflation by half a percentage point.

Consumer prices were pushed lower by cheaper mobile communication services and food. The prices of food also decreased globally. Favourable weather and improved connections lowered heating and electricity prices. The prices of motor fuels increased a bit in May as global oil price climbed because of lower stocks in the US and increased tensions in Libya.

Inflation is also modest in other countries. Euro zone inflation amounted to 0.5% in May. Low inflation was one of the reasons why the ECB decided to lower interest rates. ECB measures should lower the euro exchange rate and therefore increase the prices of imported goods and services paid in US dollars. Inflation should accelerate towards the end of the year, when macroeconomic situation is expected to improve.

Source: Swedbank