Prices in Estonia are at the level of three years ago

  • In contrast to the rest of the euro area, Estonia has seen its price level fall, as local energy prices react immediately to the global oil price
  • The deflation that has lasted almost two years has benefited consumers so far, as essential costs like energy and some foodstuffs have declined
  • Weak demand and weak price rises in foreign markets are constricting opportunities for exporting companies. Companies oriented to servicing the domestic market are relatively better off
  • The tax rises in February will affect consumer prices in the coming months

The Estonian consumer price index continued to drop in January. Data from Statistics Estonia show that the price level in January was 0.1% lower than in December and 0.6% lower than in the previous January. Harmonised consumer price inflation for the euro area has picked up in recent months and stood at 0.4% in January. The current price rises in the euro area are still below the target of the European Central Bank to maintain inflation at below but close to two per cent.

The divergence in inflation rates in Estonia and the euro area is largely due to energy prices. Sources of energy have fallen further in price in Estonia than they have on average in the euro area because taxes and distribution costs account for about one third less of the price of energy in Estonia. Falls in the oil price pass through to consumer prices much faster in consequence, so cheaper oil brought inflation down in January by 1 percentage point in Estonia but by 0.6 percentage point in the euro area as a whole.

The deflation that has lasted for almost two years has benefited consumers so far, as essential costs like energy and some foodstuffs have declined. The lack of inflation pressures in the region as a whole has been a problem for companies however. Weak demand and weak price rises in foreign markets are constricting opportunities for exporting companies. Companies oriented to servicing the domestic market are relatively better off as rising real incomes for households have supported sales at home. This is shown by retail sales volumes, which increased by 10% in December to an all-time high of 510 million euros. Core inflation, which mainly reflects developments in domestic prices, stood at 0.9% in January. Prices of services were up by 1.6% and those of industrial goods by 0.5%.

The current price level is similar to what it was three years ago, but over the past decade the price level in Estonia has climbed by 43%. Administratively regulated prices, which are mainly for some public services and a part of the energy price, have raised the general price level by 4% and consumption taxes have done so by 9%. The tax rises in February will affect consumer prices in the coming months in the same way. Rises in excise this year will lift the price level by around 0.7% and so contribute more than half of the forecast inflation rate of 1.2% for the year. Part of the rise in prices will be postponed because of warehouse stocks, as shop prices for alcohol are expected to rise during a couple of months after the increase in excise, while the retail price of motor fuels on service station forecourts rose straight away in the first days of February. Even after the rises this year in excise, prices for motor fuels in Estonia are still about one fifth lower than the average in countries of the European Union.

Estonian CPI inflation

Source: Bank of Estonia (see better graph here)

Author: Rasmus Kattai, Economist at Eesti Pank

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