Inflation in Estonia reflects price developments on global markets

Data from Statistics Estonia show that the consumer price index was 0,6% higher in March than in February. The price level was 0.6% lower compared to March 2014 and consumer prices have been falling for ten consecutive months, year-on-year. Preliminary data indicate that the harmonised consumer price deflation for the euro area was 0.1% in March, which is the smallest price decrease over the past four months.

In the first three months of this year, consumer prices were mostly influenced by major price fluctuations on commodities markets. After a sharp price decrease at the start of 2015, the price of motor fuels went up by a total of 12% in February and March. In addition to the growth of crude oil prices on global markets, the price of motor fuels in monthly terms was pushed up by the simultaneous depreciation of the euro. Motor fuels were, however, 11% cheaper than a year earlier and this is probably the reason behind the price drop of many transport services in March.

At the same time, the euro was 4.3% lower against the dollar than in February, but compared to the peak of 2008, the euro is now approximately 30% cheaper. The depreciation of the euro should cause a pick-up in inflation, but so far, the impact on inflation has been small. The influence of exchange rate fluctuations on consumer prices is limited because of the large share of other euro area countries in Estonian foreign trade: about a fifth of the cost of imported goods are open to exchange rate changes. Capital goods and the intermediate consumption of companies are imported more often on the basis of contracts in foreign currency, and the price changes of such goods are passed into consumer prices over a longer period of time. Such transactions make up around 12% of consumer goods imports. However, the depreciation of the euro against the dollar has been offset by the appreciation of the euro against the rouble, which has made imports from Russia cheaper.

Most food prices were lower in March compared to the year before, but alcohol prices grew due to a rise in excise rates. The fall in food prices was influenced by global markets: the price index of the Food and Agriculture Organisation, which reflects prices on global markets, was about 18% lower in March than a year earlier. Food prices have been falling since early 2014, both because of an increase in inventories and good harvests. However, the impact of Russian sanctions has become greater and led to lower prices for milk and meat products on the internal market of the European Union.

Eesti Pank estimates that the cost of the consumer basket price in 2015 will remain on the same level as last year. The fall in consumer prices is likely to continue over the coming months. Price increases may still be expected in the second half of the year, as domestic inflation is growing and the fall in energy prices is decreasing.

Estonian CPI inflation

Largest contributions to CPI inflation

 

Source: Bank of Estonia

Author: Rasmus Kattai, economist at Eesti Pank

Consumer prices down for the 10th month

• Deflation continued in March
• Cheaper motor fuels and food behind the drop in prices
• Inflation expected at around 0% in 2015 (-0.1% in 2014)

In March, consumer prices decreased by 0.6% compared with the previous year and increased by 0.6% compared with the previous month. Prices, especially energy and food prices, are expected to increase gradually during the second half of 2015. Inflation rate is expected to be around 0% in 2015 as a whole.

Volatile motor fuel prices have had the biggest impact on consumer prices recently. The prices of fuels increased by 4.6% in a month, but remained still 11.3% lower than in March last year. Global crude oil prices grew in euros compared with February due to the continued weakening of the euro exchange rate against the USD. There is abundant supply of crude on the market and recent negotiations with Iran will probably mean a gradual loosening of the current sanctions. Iran holds up to 10% of global oil stocks, while its production volumes have fluctuated between 3% and 5% of global oil supply during the last 30 years.

In addition to energy, food prices also fell in Estonia compared with last year. According to the FAO, global food prices have been on a declining path since April last year due to good crops and high stocks, but also because of stronger dollar against several leading food exporters’ currencies.

The EUR was 22% weaker against the USD in March, on average, compared with last year. According to the Central Bank of Estonia, around 1/3 of the imports of goods and services are paid in the USD in Estonia. As most of these goods and services are either raw materials or capital goods (and not consumer goods), the weaker euro is expected to lift Estonia’s inflation with a certain lag.

Source: Swedbank

In February the retail sales of goods was 267 euros per inhabitant

According to Statistics Estonia, in February 2015 compared to February of the previous year, the retail sales of goods of retail trade enterprises increased 8% at constant prices. In January the retail sales increased 5% compared to the same month of the previous year, while in February the growth in retail sales accelerated.

In February 2015, the retail sales of goods of retail trade enterprises were 350.9 million euros, which was 267 euros per inhabitant.

The growth of retail sales in stores selling manufactured goods accelerated significantly compared to the previous months. In the previous three months (November–January), the retail sales of those stores showed a stable 7–8% growth year over year, whereas in February the growth was 13%. The acceleration of retail sales growth in stores selling manufactured goods was partly influenced by the very low reference base of February of the previous year.

In February, the retail sales via mail order or the Internet increased the most, with sales increasing 41% compared to February 2014. A higher than average increase occurred also in other specialised stores, such as stores selling computers and their accessories, photography supplies, books, sports equipment, games and toys etc. (20% growth) and in stores selling second-hand goods and in non-store retail sale (stalls, markets, direct sale) (19% growth).

The retail sales in grocery stores have been rather stable in recent months. In February, the retail sales of these stores increased 4% compared to February of the previous year.

The retail sales of automotive fuel increased 6% at constant prices compared to February 2014.

Compared to January, in February, the retail sales in retail trade enterprises decreased 7% at constant prices. According to the seasonally and working-day adjusted data, the retail sales stayed at the same level compared to the previous month.

In February, the turnover of retail trade enterprises was 416.8 million euros, out of which the retail sales of goods accounted for 84%. Compared to February 2014, the turnover increased 6% at constant prices. Compared to the previous month, this indicator decreased 6%.Diagram: Retail sales volume index of retail trade enterprises and its trend

The statistics are based on the questionnaire “Turnover”, the deadline of which was 15 March 2015, and on VAT declaration data from the Estonian Tax and Customs Board. Statistics Estonia published the monthly summary in 11 working days.

Source: Statistics Estonia

Modest growth of sales expected in 2015

• Profitability stable despite stagnant turnover
• Investment volumes a bit larger outside the energy sector
• Modest growth of sales expected in 2015

Profitability stable despite stagnant turnover
In 2014, enterprises’ turnover and costs in Estonia stayed at the previous year’s level. While the level of total costs did not change, labour costs increased; therefore, the share of personnel expenses to total costs rose from 12% in 2013 to 13% in 2014. Despite no change in turnover, total profits grew by 3%. Profitability, measured as the ratio of total profits to turnover, has been at the same level for three years.

Investment volumes a bit larger outside the energy sector
Business sector investments increased by 2%, excluding the energy sector. Compared with 2013, investments in land, acquisition of buildings, and computers increased. Other investments decreased, with the biggest decline registered in investments in equipment and machinery, due to smaller investment volumes in the energy sector.

Modest growth of sales expected in 2015
The growth of sales and profits will probably remain limited this year. Sentiment indicators have worsened in recent months. Operating capacity in the manufacturing sector hit the seasonal average of recent years in January, but the volume of orders has been declining during the last few months. Exports to Russia have been hit, but the volume of total exports of goods was still growing, at least in January. According to the recent Swedbank survey of Estonia’s manufacturing sector, 64% of polled industrial enterprises planned to increase their turnover (by 3.0%, on average), and 44% of companies expected an increase in their profitability in 2015.

Source: Swedbank

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Stable growth in retail sales

According to Statistics Estonia, in January 2015 compared to January of the previous year, the retail sales of goods of retail trade enterprises increased 5% at constant prices.

In January 2015, the retail sales of goods of retail trade enterprises were 373.9 million euros, which was 285 euros per inhabitant.

The retail sales in stores selling manufactured goods increased 8% compared to January 2014. Sales increased in most economic activities. Only the retail sales in stores selling textiles, clothing and footwear stayed at the same level as in January of the previous year. The retail sales via mail order or the Internet increased the most, with sales increasing nearly a fourth (24%). In January, a higher than average increase occurred also in stores selling second-hand goods and in non-store retail sale (stalls, markets, direct sale) (18% growth) and in other specialised stores, such as stores selling computers and their accessories, photography supplies, books, sports equipment, games and toys etc. (16% growth).

The retail sales in grocery stores increased 4% compared to January 2014. Compared with December, the retail sales growth in these stores accelerated slightly, partly influenced by the acceleration in the price decrease of food products. While in December 2014, the annual price decrease of food products was 0.4%, then this January it was 1.8%.

The retail sales of automotive fuel stayed at the same level as in January 2014.

Compared to the previous month, the retail sales in retail trade enterprises decreased almost by a fifth (19%) at constant prices in January. This is a usual fall following the Christmas and end-of-year sales in December. According to the seasonally and working-day adjusted data, the retail sales increased 2% compared to the previous month.

In January, the turnover of retail trade enterprises was 439.5 million euros, out of which the retail sales of goods accounted for 85%. Compared to January 2014, the turnover increased by 2% at constant prices. Compared to the previous month, this indicator decreased 19%.

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

The statistics are based on the report „Turnover“, the deadline of which was 15.02.2015, and on the VAT declaration data from the Estonian Tax and Customs Board. Statistics Estonia published the monthly summary in ten working days.

Source: Statistics Estonia

Compared to last February goods were cheaper and services more expensive

According to Statistics Estonia, the change of the consumer price index in February 2015 was 0.6% compared to January 2015 and -0.8% compared to February of the previous year.

Compared to February 2014, goods were 1.8% cheaper and services 0.8% more expensive.

Regulated prices of goods and services have fallen by 1.6% and non-regulated prices by 0.6% compared to February of the previous year.

Compared to February 2014, the consumer price index was influenced the most by 16.3% cheaper motor fuel. The 2.5% price decrease of food also had a bigger impact on the index, with meat and meat products being 2.7% cheaper and milk, milk products and eggs being 3.2% cheaper than in the same month of the previous year. Among the commodities whose prices increased, alcoholic beverages and tobacco had a bigger impact on the index, as their prices increased by 5% and 5.1%, respectively. Compared to February of the previous year, of food products, the prices of dried fruit and nuts (25%) and coffee (21%) have increased the most, and the prices of sugar (44%) and potatoes (22%) have decreased the most.

In February compared to January, the consumer price index was also mainly influenced by motor fuel as its prices increased by 6.6%. The increase in the prices of fresh vegetables (16.5%) and alcoholic beverages (3.1%) had a bigger impact on the index as well. Compared to January, of food products, the prices of cabbage and mandarins increased the most (46% and 41%, respectively) and the prices of lemons decreased the most (11%).

Change of the consumer price index by commodity groups, February 2015
Commodity group January 2015 –
February 2015, %
February 2014 –
February 2015, %
TOTAL -0.8 0.6
Food and non-alcoholic beverages -1.7 0.5
Alcoholic beverages and tobacco 5.0 2.2
Clothing and footwear 1.8 2.9
Housing 0.1 -0.3
Household goods 1.0 0.0
Health 3.6 0.5
Transport -7.7 1.7
Communications -0.1 -0.1
Recreation and culture 1.0 -0.3
Education -20.6 0.0
Hotels, cafés and restaurants 2.7 -0.3
Miscellaneous goods and services 2.3 -0.1

Source: Statistics Estonia

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

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