The price level in Estonia fell last year

Data from Statistics Estonia show that the consumer basket was 0.5% lower in price in December 2014 than a year earlier and the same as in November. In 2014 as a whole the price level was 0.1% lower than in 2013. Euro area inflation turned negative in December for the first time since 2009 and initial estimates put it at –0.2%. Prices rose over the whole of last year by 0.4% in the euro area.

The biggest impact on Estonian price levels in 2014 came from the fall in the price of energy, as prices were down for electricity, motor fuels and heat. The fall in energy prices was broad based last year and was the largest in the past twenty years. The price of crude oil fell even further in the final months of 2014, reaching 42 euros a barrel by today, which is one third less than when the Eesti Pank December forecast was written. The fall of 30% in the price of oil has had a large impact on the cost of the consumer basket, causing inflation to fall by around one percentage point. Energy prices should start to rise slightly from here on as the markets expect that the fall in world energy prices is temporary, and the energy consumed in Estonia is relatively cheap at 76% of the average price paid in the European Union. Inflation will also be lifted in the coming years by tax rises and higher regulated prices. Excise on gas rose in January and excise taxes will continue to rise in the years ahead. In addition, companies in the electricity distribution network have announced the need for price rises due to lower consumption.

Core inflation fell in 2014, with prices for services rising by an average of 1.1% and those for manufactured goods falling by 0.1%. Core inflation fell despite the rapid growth in wage costs, and a large part of the fall was due to the change to make higher education free. Weak external price pressures also played an important role, with a fall in the price of motor vehicles making a major contribution, while prices for very many other imported manufactured goods fell or rose more slowly. A reduction in the profitability of Estonian economies as the economy is at a low point of the economic cycle also contributed to keeping inflation low. As economic activity increases, companies can be expected to recover profitability, which will accelerate the growth of consumer prices.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

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