Bank of Estonia: Inflation in 2016 lower than expected

The Bank of Estonia in Tallinn (Martin Dremljuga/ERR)
BNS
3/8/2016 11:15 AM
Category: Business

While the economic forecast published by the Bank of Estonia in December put expected inflation at 1.2% for 2016, as a result of the lower prices of commodities in recent months it is likely that annual inflation will turn out lower.

The Bank of Estonia made a statement to the effect in its commentary on February's inflation data.

"The main reason prices fell in Estonia was that commodity prices declined again on global markets. Reductions in prices on external markets affect Estonian consumer prices through various channels. Lower prices for imported energy and food products have a direct impact," Rasmus Kattai, economist at the central bank, said on Monday.

After the price of electricity was pushed up for a time in January by the cold weather, the decline of energy prices accelerated in February to 8.9%. Prices for motor fuels were 10.1% lower in February than a year ago, even though the euro weakened against the US dollar and the excise duty on motor fuels was raised in February.

"Cheaper commodities also affect Estonian consumer prices indirectly, as Estonian companies use imported commodities as production inputs. This brings down core inflation, or the rise in the prices of manufactured goods and services, which totaled 1.3 percent in February. On top of the fall in prices for some production inputs, the low level of economic activity also reduced core inflation," Kattai said.

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 of the Russian ruble, and the significant Russian share of Estonia's trade, though that has seen a reduction also. The total effect of the divergence in the exchange rates has been to lower Estonian inflation by an estimated 1%.

Besides that, inflation is boosted by consumers' expectations. Uncertainty in the global economy is holding back rises in consumer prices in Estonia and in the whole euro area. The consensus forecasts for Estonia of economic analysts for two years ahead have been steadily lowered for inflation and now stand at 2.3%. The calculations indicate that inflation in Estonia has been pulled down by around 0.8% by expectations in recent years.

The Estonian consumer price index in February was 0.7% higher than in January 2016, but 0.5% lower than in February 2015, Statistics Estonia reported on Monday. Compared to February 2015, goods were 0.3% cheaper, services 0.7%.

Editor: Dario Cavegn

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