Energy kept prices moving downwards in 2015

  • 2015 was a year of a sharp fall in commodities prices
  • The majority of the fall in prices in Estonia came from five goods: motor fuels, heating energy, electricity, meat products and dairy products
  • Inflation will be pushed up from February by tax rises

Data from Statistics Estonia show that the consumer basket was 0.9% lower in price in December than a year earlier and 0.7% lower than in November. The price level in Estonia fell by 0.5% over the whole of 2015. Harmonised consumer price inflation for the euro area was 0.2% in December and early estimates suggest that prices did not change over the whole year in the euro area.

The year 2015 was one of a sharp fall in commodities prices as food prices were down 19% on global markets and the oil price fell 47% over the year. A large role in the fluctuation of prices has been played by the development of oil technology and the advances in shale oil, increased oil production, favourable weather, and slower growth in emerging markets that has led demand for commodities to be weaker than expected. The mismatch between demand and supply means that commodities prices may fall further, but prices are already at the level of the middle of the last decade and there is little room for them to descend much more.

The fall in prices in Estonia in 2015 was narrowly based, with the majority of it coming from only five goods: motor fuels, heating energy, electricity, meat products and dairy products. Cheaper prices for those goods had a major impact on the consumer price index though, as they account for about one quarter of the consumer basket. The remainder of the consumer basket rose in price by 1.4% last year.

Food other than alcohol and tobacco was down 0.5% in price during 2015 and the fall in the prices of dairy and meat products was one of the largest in the European Union. Producer and consumer prices for food in Estonia have previously moved more in line with the cycle of rises and falls on the global market than have those in most other European Union countries. It may be expected in consequence that if food prices start to rise on global markets, food price inflation will be higher in Estonia than the average in the euro area.

The decline in the oil price at the start of the new year will restrain prices from starting to rise in the early months of the year at least. Inflation will be boosted from February by the rise in excise on motor fuels and alcohol. Rises in excise will lift inflation by around 0.7 percentage point, though the rise in excise on tobacco in June will only be felt in retail prices in the second half of the year because of stocks built up in warehouses. The impact of administrative factors will be further increased in the second half of the year when the effect of the introduction of free higher education passes out after three years during which it has held inflation down by 0.3-0.4 percentage point. Taking all these factors together, consumer prices will increase slowly in 2016, with the price level forecast to rise by 1.2%.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

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