Consumer prices down by 1.3 pct in January

• Deflation bigger than expected
• Cheaper motor fuels and food behind the drop in prices
• Inflation expectations are declining, but 53% of consumers still expect prices to go up in the future

In January, consumer prices decreased by 1.3% compared with the previous year and 0.4% compared with December. In January, prices were pushed down the most by cheaper motor fuels, which dropped by 20.7%, year-on-year, and 8.3%, month-on-month. In addition to transportation, the prices of food (mostly vegetables), housing and education declined.

Most of the consumers do not feel the decline in prices. Price expectations have decreased, but 53% of consumers still expect prices to grow and only 5% of respondents expect prices to decline during the next 12 months.

Prices, especially energy and food prices, will start to increase gradually during the second half of 2015. The price of crude oil is forecast to decline by around half in US dollars and by around one-third in euros in 2015, compared with 2014. However, the prices of motor fuels in Estonia are expected to decline much less, as taxes amount to half of the retail price of gasoline.

As Estonia’s economy is relatively energy intensive, most of the sectors’ competitiveness should improve. At the same time, a few sectors will lose out, i.e., the shale oil industry (around 2% of Estonia’s GDP).

Food prices are currently weak globally due to abundant supply and slower growth of demand in some leading importers, like China and Russia. Food prices are expected to increase in the second half of this year, when food demand will strengthen. The prices of imports will rise somewhat during the course of the year due to cheaper euro against the USD (-15%, year-on-year, in January).

Source: Swedbank

January inflation was influenced by motor fuel

According to Statistics Estonia, the change of the consumer price index in January 2015 was -0.4% compared to December 2014 and -1.3% compared to January of the previous year.

Compared to January 2014, goods were 2.3% cheaper and services 0.6% more expensive.

Regulated prices of goods and services have fallen by 3.2% and non-regulated prices by 0.7% compared to January of the previous year.

Compared to January 2014, the consumer price index was influenced the most by motor fuel, which was 20.7% cheaper. The 2.5% price decrease of food also had a bigger impact on the index – nearly a half of this increase was caused by 13% cheaper vegetables. Compared to the same period of the previous year, 3.1% more expensive alcoholic beverages and 7.2% more expensive tobacco had a bigger impact on the index as well. Compared to January 2014, of food products, the prices of coffee have increased the most (21%) and the prices of sugar (43%) and fresh vegetables (18%) have decreased the most.

In January compared to December 2014, the consumer price index was also influenced the most by motor fuel as its prices fell by 8.3%. The increase in the prices of alcoholic beverages by 4.3%, caused by the ending of the December discounts and the implementation of new rates of excise duty as well as the widespread sales of clothing and footwear, also had a bigger impact on the index. Compared to December, of food products, the prices of carrots increased the most (42%) and the prices of oranges decreased the most (16%).

The previous time that the change in the consumer price index remained under -1.3% compared with the same month of the previous year was in December 2009 when the change was -1.7%.

Due to continuous changes in consumption patterns and prices, Statistics Estonia updates the weights system of the consumer price index and the representative goods every year. In 2015, the weights system of the consumer price index corresponds to the average expenditure structure of the population in 2014. The base prices used for calculations are December prices of the year 2014. To ensure comparability with previous periods, the consumer price index is continued to be published on the base 1997 = 100. The linking month is December 2014. The consumer price index is published on the 5th working day of the month following the end of the reference month. The table presents the expenditure structure (weights) used in 2014, as well as the expenditure structure used since the index of January 2015.

Read more from Statistics Estonia

Retail sales of goods increased 6 pct in December

// // The stable growth in retail sales continued also in the last month of the year – Statistics Estonia

According to Statistics Estonia, in December 2014 compared to December 2013, the retail sales of goods of retail trade enterprises increased 6% at constant prices. Since August, the retail sales growth has remained within a stable of 5–6% compared to the same month of the previous year.

In December 2014, the retail sales of goods of retail trade enterprises were 463.9 million euros, which was 353 euros per inhabitant.

The retail sales in stores selling manufactured goods increased 7% at constant prices compared to December 2013. Sales increased in most economic activities. Only the retail sales in non-specialized stores selling predominantly industrial goods (e.g. department stores) and in stores selling second-hand goods and non-store retail sale (stalls, markets, direct sale) were smaller than in December of the previous year. The retail sales via mail order or the Internet increased the most, with sales increasing slightly more than a fifth (22%). The retail sales increased also in stores selling household goods and appliances, hardware and building materials (9% growth), in stores selling pharmaceutical goods and cosmetics (9% growth), in other specialized stores, such as stores selling computers and their accessories, photography supplies, books, sports equipment, games and toys etc. (8% growth) and in stores selling textiles, clothing and footwear (6% growth).

The retail sales in grocery stores increased 3% compared to December 2013.

The retail sales of automotive fuel increased 10% at constant prices compared to December of the previous year, which was a significantly faster growth than in November. The acceleration in the growth in the retail sales of automotive fuel was influenced by the low reference base of December 2013 and the acceleration in the price decrease of automotive fuel. In November 2014 the annual price decrease of automotive fuel was 4.4%, while in December it was 14.1%.

In December compared to November 2014, the retail sales in retail trade enterprises increased almost by a fifth (19%) at constant prices. This is a usual rise in December when Christmas marketing takes place.

In December, the turnover of retail trade enterprises was 543.6 million euros, out of which the retail sales of goods accounted for 85%. Compared to December 2013, the turnover increased by 5% at current prices. Compared to November 2014, this indicator increased 13%.

According to preliminary data, the retail sales of retail trade enterprises were nearly 4.9 billion euros in 2014; compared to 2013, the retail sales increased 6% at constant prices.

Diagram: Retail sales volume index of retail trade enterprises and its trend


Source: Statistics Estonia

Statoil turns to Supreme Court over alcohol sale ban

One of the largest vehicle fuel retailers, Statoil, has asked the Supreme Court for its opinion on Tallinn City Council’s ban on the sale of strong alcohol in filling stations, which is due to come into effect on July 1.

The company said the ban is unconstitutional as it goes against the freedom of enterprise, and previous rulings by the Supreme Court have said such bans are illegal.

Statoil said the ban, due in effect on July 1, should be postponed until the court has come to a conclusion.

The ban, among a number of others to limit the availability of alcohol, is part of the city’s drive against alcohol consumption.

Source: ERR News

Tallinn limits the sale of alcohol

Following the Tallinn City Council’s decision to limit alcohol sale on the city’s territory, approximately 124 will lose the right to sell alcohol, according to the calculations.

These are shops that are located less than 50 meters from the entrance of primary, secondary and vocational schools, or do not satisfy the increased total sales area requirement.

The City Council doubled the minimum size of licensed shops, from 75 to 150 square meters. The restriction aims to limit the number of corner shops in residential areas, which specialize in selling alcohol.

Gas stations have also been banned from selling alcohol in an attempt to decrease the risk of alcohol-related road accidents.

In addition, the sale of alcohol during sporting events has been confined to a restricted area of the venue.

The Deputy Mayor of Tallinn, Merike Martinson, referred to the data released by the National Institute for Health Development, which put alcohol-related deaths in Tallinn at 139. According to a study by Estonian Institute of Economic Research, 83 percent of Estonian population said that alcohol consumption must be cut down and 51 percent polled said it should be done by imposing strict regulations.

“Whereas most of the European countries have four or five outlets that sell alcohol per 100,000 people, this number is 195 in Estonia and 440 in Tallinn,” Martinson said. “The facts indicate alcohol consumption and the resulting accidents have reached a dangerously high level, and something must be done about it.”

The changes will come into effect in July 1.

Source: ERR News

The price level in Estonia fell last year

Data from Statistics Estonia show that the consumer basket was 0.5% lower in price in December 2014 than a year earlier and the same as in November. In 2014 as a whole the price level was 0.1% lower than in 2013. Euro area inflation turned negative in December for the first time since 2009 and initial estimates put it at –0.2%. Prices rose over the whole of last year by 0.4% in the euro area.

The biggest impact on Estonian price levels in 2014 came from the fall in the price of energy, as prices were down for electricity, motor fuels and heat. The fall in energy prices was broad based last year and was the largest in the past twenty years. The price of crude oil fell even further in the final months of 2014, reaching 42 euros a barrel by today, which is one third less than when the Eesti Pank December forecast was written. The fall of 30% in the price of oil has had a large impact on the cost of the consumer basket, causing inflation to fall by around one percentage point. Energy prices should start to rise slightly from here on as the markets expect that the fall in world energy prices is temporary, and the energy consumed in Estonia is relatively cheap at 76% of the average price paid in the European Union. Inflation will also be lifted in the coming years by tax rises and higher regulated prices. Excise on gas rose in January and excise taxes will continue to rise in the years ahead. In addition, companies in the electricity distribution network have announced the need for price rises due to lower consumption.

Core inflation fell in 2014, with prices for services rising by an average of 1.1% and those for manufactured goods falling by 0.1%. Core inflation fell despite the rapid growth in wage costs, and a large part of the fall was due to the change to make higher education free. Weak external price pressures also played an important role, with a fall in the price of motor vehicles making a major contribution, while prices for very many other imported manufactured goods fell or rose more slowly. A reduction in the profitability of Estonian economies as the economy is at a low point of the economic cycle also contributed to keeping inflation low. As economic activity increases, companies can be expected to recover profitability, which will accelerate the growth of consumer prices.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

Falling prices don’t affect the economy

Data from Statistics Estonia show that the consumer price index was 0.8% lower in November than in October and that prices had fallen by 0.6% over the year. Deflation has been driven by energy prices falling throughout the year, and this was exacerbated by lower core inflation and food price inflation. Price pressures continued to decrease across the euro area as a whole, mainly because of cheaper energy, and preliminary assessments show that harmonised consumer price inflation for the euro area was 0.3% in November.

The short-term fall in consumer prices, which is mainly caused by lower energy prices, does not pose any problem for growth in the Estonian economy. Falling prices reduce economic activity if the fall continues for a long time and causes consumption decisions to be postponed. Prices that are currently falling are mainly those for goods and services where consumption is very difficult or impossible to postpone.

Food price inflation fell to 0.2% in November, mainly because alcohol became cheaper, though prices fell substantially for several other food products too. The impact of Russian import restrictions has so far mainly been felt in the fall of purchase prices for food products and the impact on consumer prices has been small, with prices for meat and meat products falling in November and those for milk and dairy products rising. Low prices for the main food commodities on world markets mean that food price inflation will be relatively low in 2015 despite the rise in excise rates that will come in next year. The rise in excise is expected to raise food price inflation by two percentage points and inflation for the consumer basket as a whole by 0.5 percentage point.

Prices for motor fuels have fallen by 4.4% over the year, and those for electricity by 6.6%, and this has brought inflation down by 0.5 percentage point. Cheaper energy means that Estonian consumer prices will probably fall for this year as a whole. With oil at its current price level, consumer prices will rise by less next year than the long-term inflation expected for Estonia, as inflation will probably start to be restrained by imported natural gas, which follows changes in the exchange rate and the price of oil products with a lag. The result could be that heat prices for consumers also fall. Prices for district heating were restrained from falling in the second half of this year by a depreciation of the euro.

Core inflation declined in the second half of 2014 because of falls in the prices of manufactured goods and lower inflation for services. Lower inflation for services is in line with slower growth in wages. Rents also rose more slowly as the real estate market adjusted, and the rise in November was 5.5%. The manufactured goods that saw prices fall were cars and household electronics, but inflation was low for clothes and footwear.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank


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