Prices temporarily declined compared to last year

Data from Statistics Estonia show that prices did not change for consumers during June but they were 0.4% lower than a year earlier. The main reason for the fall in prices was that electricity was 13% cheaper than a year earlier. The price of electricity hit a record peak last June as generation capacity in the Baltic states was restricted by interruptions to supply, but in June this year the electricity price on the power exchange was one of the lowest ever recorded. Prices also fell for fruit and vegetables and for communications services.

Preliminary assessments show that inflation in the euro area stood at 0.5% in June, which was the lowest for several years. Although inflation is picking up in the euro area, it will remain modest as economic activity there is only growing slowly. Low price pressures in the external environment and lower prices for imported goods contributed a significant amount to the fall in Estonian prices, with durables that mostly include imports falling in price by 3.6% in June. An exception was motor fuels, which rose in price by 0.8% as global oil prices started to rise in response to geopolitical tensions. The oil price in euros has been stable since 2011, fluctuating within a narrow range of 80-90 euros a barrel.

Although falling prices generally hinder economic growth, the effect this time is rather the opposite, as falling prices driven mainly by energy prices favour both households and companies. Falling prices reduce economic activity if the fall continues for a long time as they can cause consumption decisions to be postponed. The current fall in prices will prove only temporary because inflation will pick up in the second half of the year as energy prices stop falling and food prices rise more quickly. Eesti Pank’s forecast expects that prices will rise by 0.8% in 2014.

Source: Bank of Estonia

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

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