Deflation slowed in February

Data from Statistics Estonia show that the consumer price index was 0.8% lower in February than a year earlier, meaning the fall in prices was smaller than that in the preceding month. The harmonised index of consumer prices for the euro area also fell by less as deflation slowed from -0.6% to -0.3%.

The global oil price ended its rapid slide of more than half a year in February, leading the price of motor fuels in Estonia to rise by 6.6% during the month and the consumer price level as a whole to rise by 0.6% from January. Motor fuels were still 16% cheaper than a year earlier, and the fall in the oil price on world markets started to have an indirect effect on other components in the consumer basket. Gas prices had already fallen for residential consumers in January by 5% from December’s levels and the consequences of the fall in the oil price were felt strongly by the price of heating, as it fell by 1% over the month in February. Although prices of imported energy have fallen substantially over the year, the fall has been restrained somewhat by the exchange rate of the euro hitting its lowest level for over ten years. The fall in the oil price to date has benefited the Estonian economy by boosting consumption and through that, economic growth.

Food prices were down in February, mainly because of price movements in global markets and the European Union’s internal market, as the food price index of the FAO (Food and Agriculture Organization) stood 14% lower in February than a year earlier. The disappearance of the Russian market as a destination market for food exporters has started to show up more and more in the food producers price index, though the impact on the consumer price index for food products has so far been limited. This can be seen in the farm gate price for milk at which dairy farms sell their output, which was 38% lower in January than it was a year earlier, while the latest data show the consumer price of dairy products falling by only 3.2%. Similarly, the farm price of beef has fallen by 10% over the year and that of pork by 15%, while consumer prices are down only 2.7%. An exception among food products was alcohol, which saw prices rise as higher excise taxes accelerated the inflation in the price of strong alcoholic drinks to 7.4%.

The largest fall in consumer prices has probably now ended, because the world oil price has started to rise. Consumer prices will continue to fall in the months ahead, but in the second half of the year growth will return to consumer prices and inflation for 2015 as a whole will be in positive territory, though close to zero.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

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