Falling prices don’t affect the economy

Data from Statistics Estonia show that the consumer price index was 0.8% lower in November than in October and that prices had fallen by 0.6% over the year. Deflation has been driven by energy prices falling throughout the year, and this was exacerbated by lower core inflation and food price inflation. Price pressures continued to decrease across the euro area as a whole, mainly because of cheaper energy, and preliminary assessments show that harmonised consumer price inflation for the euro area was 0.3% in November.

The short-term fall in consumer prices, which is mainly caused by lower energy prices, does not pose any problem for growth in the Estonian economy. Falling prices reduce economic activity if the fall continues for a long time and causes consumption decisions to be postponed. Prices that are currently falling are mainly those for goods and services where consumption is very difficult or impossible to postpone.

Food price inflation fell to 0.2% in November, mainly because alcohol became cheaper, though prices fell substantially for several other food products too. The impact of Russian import restrictions has so far mainly been felt in the fall of purchase prices for food products and the impact on consumer prices has been small, with prices for meat and meat products falling in November and those for milk and dairy products rising. Low prices for the main food commodities on world markets mean that food price inflation will be relatively low in 2015 despite the rise in excise rates that will come in next year. The rise in excise is expected to raise food price inflation by two percentage points and inflation for the consumer basket as a whole by 0.5 percentage point.

Prices for motor fuels have fallen by 4.4% over the year, and those for electricity by 6.6%, and this has brought inflation down by 0.5 percentage point. Cheaper energy means that Estonian consumer prices will probably fall for this year as a whole. With oil at its current price level, consumer prices will rise by less next year than the long-term inflation expected for Estonia, as inflation will probably start to be restrained by imported natural gas, which follows changes in the exchange rate and the price of oil products with a lag. The result could be that heat prices for consumers also fall. Prices for district heating were restrained from falling in the second half of this year by a depreciation of the euro.

Core inflation declined in the second half of 2014 because of falls in the prices of manufactured goods and lower inflation for services. Lower inflation for services is in line with slower growth in wages. Rents also rose more slowly as the real estate market adjusted, and the rise in November was 5.5%. The manufactured goods that saw prices fall were cars and household electronics, but inflation was low for clothes and footwear.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: