Consumer prices continued to decline in July

Data from Statistics Estonia show that consumer prices in July were 0.4% lower than a year earlier and 0.2% lower than in June. Preliminary assessments show that harmonised consumer price inflation for the euro area slowed to 0.4% in July.

The main causes of the decline in the Estonian consumer price index were falls in the prices of energy and food and a further drop in the price of durables. Slower growth in the prices of food on world markets has come in response to several factors, and the impact of this has also been passed into Estonian consumer prices. One factor is that the slow economic growth in emerging markets has reduced price pressures from demand for food commodities, and another is that favourable weather conditions have boosted harvest expectations, which have prevented prices from rising. The result has been that the price index for cereal fell by 7% over the month on world markets in June and by a further 9.7% in July. Global prices for dairy products also fell due to increased supply, though Estonian prices for dairy products continued to rise relatively rapidly in July. The effects of global prices can take up to six months to be reflected in Estonian dairy products. Food prices may rise more quickly in the second half of the year as prices for fruit and vegetables climb from their current very low levels.

Core inflation remained low in July. Among imported manufactured goods, cars and home electronics fell in price again in July, and were joined by clothing and footwear, which were affected by seasonal sales. The decline in core inflation to 0.3% indicates not only that import prices have fallen, but also that domestic price pressures are lower. Domestic inflation has been driven in recent years by rapid wage growth, which has now slowed somewhat. Growth in real wages remains fast as the consumer basket becomes cheaper, and it stands at around 5%. Services inflation is restrained by free higher education and constantly falling prices for communications.

Eesti Pank forecasts that inflation for 2014 will be 0.8%.

Source: Bank of Estonia

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

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