The ghost of deflation

• Consumer prices surprisingly low in 2014
• Lower energy and food prices behind deflation
• Prices turning upwards again in 2015

Consumer prices surprisingly low in 2014
The consumer price level has been on a sharp downward trend in Estonia since summer of 2013. In October, deflation continued for the fifth consecutive month. Price growth expectations have also come down, although the majority of the respondents still expect prices to grow in the future.

Lower energy and food prices behind deflation
Deflation has hit Estonia due to a combination of several factors. Externally, the falling price of oil and a stronger euro have pushed down the prices of energy and other imported goods. Internally, tighter competition on the electricity market has suppressed prices of electricity. Favourable weather, good crop yields, and the restrictions on exports to Russia have slashed food prices.

Prices turning upwards again in 2015
Consumer prices will start to gradually increase next year, from 0.0% in 2014 to 1.3% in 2015, on average. The price increase will be supported by a weaker euro and an increase in excise tax rates. The contribution of these two factors to the overall consumer price level in 2015 is expected to be around half a percentage point, each. At the same time, global commodities markets, including for oil, will remain soft, with ample supply. We expect the price of oil in euros to decline by around 3% in 2015; thus the prices of motor fuels should also shrink a bit in Estonia next year.

Read more from Swedbank report

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