Data from Statistics Estonia show that consumer prices continued to fall in August, declining by 0.3%, as they had in the previous month. The consumer price index stood 0.3% lower in August than in July. Inflation in the euro area has been stable at 0.2% for the past three months despite significant volatility in the prices of fuels.
Prices of the main sources of energy continued to fall in August as motor fuels were down 14% on the year, natural gas was down 19%, and heat energy was down 5%. Prices of imported energy are still some 30% higher than they were during the crisis in 2009, partly because the euro has been weak against the dollar. Cheaper energy benefits the Estonian economy as it allows consumption to increase, boosting GDP growth. The fall in energy prices in the past year has raised real household incomes by 1.3%. The low price of oil on global markets is likely to prove temporary however, and long-term consumption and investment decisions should not be based on that price.
The remainder of the consumer basket without energy increased in price by 1.1% in August. The share in the consumer basket of goods and services for which prices are falling has shrunk consistently over recent months, and whereas prices were falling for half of all goods and services at the start of the year, in August they were falling for only 43% of them. Having fallen for a long time, the import prices of manufactured goods started to rise from the second quarter. This was probably due to the weaker exchange rate for the euro. The rise in import prices has been more clearly transmitted into retail prices in the euro area but the effect in Estonia has been minor so far. Service price rises accelerated to 2.2% in August, mainly because prices for leisure services and rents rose.
Source: Bank of Estonia
Author: Rasmus Kattai, Economist at Eesti Pank