- The main cause of the fall in prices in February was the continuing descent of commodity prices on the global market
- Prices fell for motor fuels in February even though the euro has weakened against the dollar and higher excise rates started to apply
- Estonian companies use imported commodities as production inputs, and this has reduced core inflation
- Uncertainty in the global economy is holding down the expectations of consumers and slowing growth in consumer prices in Estonia and in the euro area
Data from Statistics Estonia show that the consumer price index was 0.5% lower in February than a year earlier. The harmonised index of consumer prices for the euro area was also down, with consumer prices down by 0.2% over the year.
The main reason prices fell in Estonia was that commodities prices were again down on global markets. Falls in prices in foreign markets affect Estonian consumer prices through various channels. Lower prices for imported energy and food products have a direct impact. After the price of electricity was pushed up for a time in January by the cold weather, the fall in energy prices accelerated in February to 8.9%. Prices for motor fuels were 10.1% lower in February than a year earlier even though the euro had weakened against the US dollar and excise on motor fuels was raised in February.
Although the euro is lower against the dollar, the nominal effective exchange rate for Estonia, which takes account of all trading partners and the currencies used in transactions, has constantly strengthened over the past year. The main reason for this has been the sharp fall in the Russian rouble and the significant Russian share of Estonia’s trade, though the share has been reduced. The total effect of the divergence in the exchange rates has been to lower Estonian inflation by an estimated one percentage point.
Cheaper commodities also affect Estonian consumer prices indirectly as Estonian companies use imported commodities as production inputs. This brings down core inflation, which is the rise in prices of manufactured goods and services, and in February it stood at 1.3%. On top of the fall in prices for some production inputs, the low level of economic activity also reduced core inflation.
Inflation is also moved by the expectations of consumers. Uncertainty in the global economy is holding back rises in consumer prices in Estonia and in the whole of the euro area. The consensus forecasts of economic analysts for Estonia two years ahead have been steadily lowered for inflation to 2.3%. The calculations indicate that inflation in Estonia has been pulled down by around 0.8 percentage point by expectations in recent years. The economic forecast published by Eesti Pank in December put expected inflation at 1.2% for 2016, but the lower prices for commodities in recent months make it probable that inflation will be lower.