Ministry: Decline in consumer prices to continue through end of year

Euros (photo is illustrative).
Euros (photo is illustrative). Source: Siim Lõvi/ERR

Consumer prices in Estonia have reacted strongly to the coronavirus crisis, and estimates indicate that a decline in the consumer price index (CPI) will continue through the end of 2020, Kristjan Pungas, analyst at the Fiscal Policy Department of the Ministry of Finance, said on Friday.

"The last time there was such decline in prices was amid the past economic crisis almost 10 years ago," Pungas said in a press release. "The decline in consumer prices in May compared with the same month a year ago will also remain the lowest level of the current downward cycle in light of the latest developments."

The May CPI in Estonia was down 0.7 percent on month and 1.7 percent on year, and the biggest contributor to the price decline was cheaper motor fuel, Statistics Estonia said on Friday.

In the euro area, inflation decelerated to 0.1 percent, according to a preliminary estimate.

A price reduction in energy products continued, and the price increase in non-processed food, meaning mostly horticultural products, decelerated somewhat in the euro area.

"Although the price of oil started to recover on foreign markets again in May from the lows of April, the lowest price level reached gas stations here with a lag — the latest price reduction at the beginning of May — and on a smaller scale than in our neighbors to the south or in the euro area more broadly," Pungas said.

The effect of the price reduction that took place last month included, fuel is cheaper by almost one-fifth than a year ago. Due to reduced consumption, the price of electricity on the free market has been very low in recent months, as a result of which electricity bills have shrunk by 17 percent on year, he noted.

Where in 2019 and at the beginning of this year the rate of increase in service prices was almost 4 percent, beginning in April, the increase in the prices of services has halted under the impact of the coronavirus crisis.

"This has been expressed to a bigger degree in a reduction in hotels, ferry tickets and rents, which have declined respectively by 20 percent, 13 percent and 8 percent on year," Pungas said. "While a decade ago, the reduction in fiscal intake was compensated with tax increases, thereby reducing the reductions in prices, this time around, measures by the state have rather leveraged price reductions."

Reductions in fuel, gas and electricity excise duties passed as part of the legislative package related to the supplementary budget entered into force on May 1.

Measures taken by municipalities that were discontinued following the conclusion of the emergency situation, beginning in June, likewise played a role in pushing the CPI lower, Pungas noted.

"These measures helped lower the CPI almost by 0.8 percentage points," he said.

According to current estimates, the decline in consumer prices is estimated to continue through the end of the year, and Estonia's annual rate of CPI change is estimated to be slightly below zero.


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Editor: Aili Vahtla

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