Taxes raised the price level in September

  • Inflation is low in Estonia, but still amongst the highest in the euro area
  • Without tax rises, prices would have remained at close to the same level as last year
  • Inflation will rise further in the coming months

The rate of increase in consumer price inflation (CPI) in Estonia climbed in September to 1% from 0.3% a month ago. Prices in Estonia were 0.2% higher than in August. The harmonised index of consumer prices (HICP), which also includes purchases made in Estonia by tourists 1, rose by 1.1% in August according to the latest available statistics, this being notably higher than the euro area average and the second highest behind only Belgium. The average inflation rate in the euro area has ranged between 0.2% and 0.4% in recent months. Prices continued to fall in eight euro area countries, or about half of them, in August.

Inflation rose in Estonia for three main reasons, which were rises in excise, state regulated prices, and the low reference base of a year ago for energy prices. Most of the growth in the consumer price index in September over the previous year came from higher excise rates for fuel, alcohol and tobacco, and the rise in those rates added 0.8 percentage point to inflation. The influence of the introduction of free services has also passed out of the calculation by now, having started in 2013 with the change to make public transport in Tallinn free of charge. The effect from the introduction of free higher education passed out this September after three years, having offset the higher inflation caused by tax rises until now. Service price inflation accelerated substantially in September 2014 from 0.2% to 1.9%.

The inflation figure is affected not only by the price changes that occur during the month, but also by the changes in the prices of goods and services 12 months earlier, which is known as the reference base effect. In the second half of last year prices for both oil and food commodities fell very quickly on global markets, but commodities have probably passed the bottom of their fall by now. The reference base effect for prices of motor fuels alone lifted inflation in Estonia by around 0.3 percentage point in August and September, and the effect will increase until the start of the new year. This means inflation will continue to rise even though the global oil price has stabilised in recent months.

1 The main difference between the HICP and the CPI is that the HICP also takes in purchases by tourists within the territory of the country. The HICP is also used as the reference value for price stability in the euro area, and allows a better comparison of changes in the price levels in different countries.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

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