Prices fell further in August

Consumer prices fell further in August, ending up 0.7% down on a year earlier and 0.3% lower than in July according to Statistics Estonia. Consumer prices mostly fell faster because of lower energy prices, but also because food prices were down. Preliminary assessments by Eurostat show that harmonised consumer price inflation for the euro area slowed to 0.3% in August. Lower inflation in the euro area as a whole was also largely due to lower energy prices.

Energy prices for Estonian residential consumers in August were 4.7% below where they were a year previously. This was driven by motor fuels and heat energy, and above all by the electricity price. Prices for electricity on the energy exchange were low in summer, while a year ago they were held up by a shortage of capacity in the Baltic region caused by interruptions to production and a lack of access to the Scandinavian electricity market. The price of electricity on the exchange in August was 30% lower in Estonia than in Latvia or Lithuania.

Food prices on global markets have been falling since May. The forecast of harvests released by the International Grains Council in July and August for different regions of the world predicted that grain production will be close to its all-time record level, which will push grain prices to fall even further. On top of this, the decline in fruit and vegetable prices that started in the spring will continue, as prices continue to adjust downward from their peak of last year, which was the result of unfavourable weather for growing.

In the near future the impact of the Russian ban on imports of food is likely to be reflected in consumer prices, including those for meat, fish, fruit and dairy produce. The closure of the Russian market to some foodstuffs has mainly affected the wholesale price of raw milk, which has fallen. That is why it is likely that the rapid inflation seen in August in prices of milk and milk products will decelerate. To prevent prices falling too far, the European Union has decided to introduce emergency market measures, such as Private Storage Aid and interventionary wholesale purchases, allowing the market to stabilise somewhat.

Core inflation did not change much in August. Services other than communications rose by 2.2% in price, but the fall of 3.8% in the price of communications services meant that overall service price inflation was 1%. The fastest falling prices among services were seen by travel for tourism and accommodation services, while rent prices continued to rise rapidly at 13%. Prices for manufactured goods started to fall in June and have continued to do so in subsequent months. The fall has particularly affected durables in the form of cars and household electronics.

Source: Bank of Estonia

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

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