Inflation Makes U-Turn

(Reuters/Scanpix)
7/7/2014 4:14 PM
Category: Economy
Until the beginning of this year, Estonia was the Eurozone leader in inflation. By the second week of July, Estonia’s inflation has dwindled close to the average.

Statistics Estonia revealed today, that Estonia's current level of inflation is 0.4 percentage points smaller compared to the previous year’s statistics. The Eurozone, as a whole, saw an esitamated 0.5 percent rise in prices, which is also slower than several past years.

Comparing Estonian inflation to the Eurozone’s, Harmonized Index of Consumer Prices (HICP) is used, which takes into account tourist expenditures. The Ministry of Finance speculates that the Estonian HICP could have reached 0.1 – 0.2 percent during June, which means that Estonian inflation is smaller than that of the Eurozone average.

The main reason for the price-cutting is electricity, which compared to last year’s June, is 13 percent cheaper. The head of the Economic Division of the Bank of Estonia, Rasmus Kattai, said that the high electricity prices last year were the direct result of production disruptions in the Baltic states, which temporarily restricted production capacities. Currently all issues have been resolved, which in can be seen in the all-time low price levels on the power exchange.

Decreased commodity prices and a strong euro have led to a drop in import prices. Analyst for the Ministry of Finance’s Fiscal Policy Division, Kristjan Pungas, said that after the spring’s climax of food prices in foreign markets, some depression has been seen. Local consumers are mainly influenced by favorable weather, which manifests itself in cheaper fruit and vegetable.

Other major price changes in June can be seen in housing and rental prices, which are seasonally influenced. Fuel saw a rise in price due to the Iraq conflict whereas alcohol saw a decrease in prices.

Pungas also added that the year-on-year price change will stay close to zero during the upcoming months, although it could see a leap in autumn. This subtle increase in inflation during autumn will be influenced by the forthcoming price developments in the food sector. Due to the cooler beginning of summer, yields may suffer in the Baltics and elsewhere in northern Europe.

Kattai said that a fall in prices can usually suppress economic revival. Currently it possesses an opposite property, because the main reason why inflation has dwindled is the decrease of electricity prices, which is beneficial to households and companies alike.

The Bank of Estonia estimates that the yearly inflation will see a 0.8 percent increase.


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