Service prices rose but the overall price level continues to decline

  • Prices were down because of the broad-based fall in energy prices
  • Prices will stop falling in the next few months
  • Inflation in the euro area is below expectations as commodities prices continue to slide
  • Declining prices for a year and a half have dampened the price expectations of companies

Data from Statistics Estonia show that consumer prices were 0.1% higher in October than in September, while the drop in prices over the year was down to 0.6%. The average price level in the euro area was no different from the level of last October.

Prices were down because of the broad-based fall in energy prices as motor fuels, heating energy and electricity all became cheaper. The drop in the electricity price was the smallest seen in the past two years. Lower prices for food, particularly dairy and meat products, had a major impact on the fall in prices but core inflation, which is inflation in the consumer basket without energy and food, rose to 1.4% in October. Prices for services were up 3.2%, or over 4% if the effect of free higher education is excluded, meaning that service price inflation was three times higher than the 1.3% recorded in the rest of the euro area. Manufactured goods were 0.3% down in price at the same time, indicating that the effect of the depreciation of the euro has not yet passed into consumer prices.

Year on year inflation will start to draw on a low comparison base from November, and so it may be supposed that prices will stop falling in the coming months and that inflation will start to pick up gradually at the start of next year. The effect of the comparison base is large for both energy and food because the sharpest fall in the oil price came at the start of 2015. At this time food prices started to be affected strongly by the Russian import ban.

As the rise in prices of the main commodities has been postponed and growth in large countries is fragile, inflation has been lower in the euro area than was forecast. Although short-term inflation expectations have come down a little in recent months, long-term expectations for inflation remain unchanged at 1.9%. Declining prices for around a year and a half have dampened the price expectations of Estonian consumers and companies. Data from the Estonian Institute of Economic Research show that companies in manufacturing and trade expect inflation to be even lower than usual in the coming months. Eesti Pank will publish a new economic forecast, including an inflation forecast on 9 December.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

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