Inflation remained high in June because of rising food prices

  • Estonia stands out among the euro area countries for the general rise in food prices
  • Inflation has been reined back by external factors, primarily the lower oil price
  • The low oil price means that inflation this year will remain close to 3%

Yearly growth in consumer prices stood at 2.9% in June according to Statistics Estonia. The growth in energy prices slowed to 2.6%, and food prices, including alcohol and tobacco, were up 6.1%. Core inflation was 1.3% over the year though.

Around half of the inflation in Estonia is driven by import prices, while the other half depends on domestic factors. Global market prices for oil and industrial commodities have fallen a little in recent months, but there has been no particular change in the price level of food. External factors, primarily the low oil price, have encouraged inflation to come down. Inflation in the euro area was slowed in June to 1.3% by the fall in energy prices, but core inflation remained low despite economic activity increasing. The latest data and survey results show growth remaining fast in the euro area economy, and this should start to pass through more strongly into inflation. The price stability goal of the European Central Bank is that inflation in the euro area should rise to close to, but just below, 2%.

Estonia stands out among the euro area countries for the general rise in food prices. Food prices were up over the year by 6.1% in Estonia in June, and by 1.4% in the euro area. Prices for dairy products and fruit were up more than 10% over the year in Estonia, though the price level of vegetables and fish products has fallen in recent months. Consumption has been aided by domestic factors, primarily wage growth and increased employment, though also by favourable financing conditions for loans. Despite that, the growth in retail sales volumes has been quite modest in recent months if car sales are excluded. Inflation started to fall for industrial products in June, partly because of seasonal factors, though core inflation points to a rise in services prices. Service price inflation was high in June at 2.8%. Communications and holiday travel, two groups that account for a large share of services, saw prices fall, but this was cancelled out by the rise in prices for the other groups of services. Without those two groups, prices for services were up more than 4%.

The low oil price means that inflation this year will remain close to 3%. Around one third of inflation will be due to tax rises this year.

Source: Bank of Estonia

Author: Sulev Pert, Economist at Eesti Pank

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