Economist: Continued deflation caused by poor economic activity

The Bank of Estonia building in Tallinn
The Bank of Estonia building in Tallinn Source: Siim Lõvi /ERR

The prices of services continued declining in June due to the tourism sector having suffered severe damages as a result of the coronavirus crisis, Sulev Pert, economist at the Bank of Estonia, said.

According to data by Statistics Estonia, the change of the consumer price index in June 2020 was 0.9 percent compared to May 2020 and -1 percent compared to June of the previous year.

The month-on-month change in the index was affected most by a rise in the price of electricity, which contributed to the growth with 0.5 percentage point, and the lifting of the measures introduced during the emergency situation.

Pert said in a press release that the price of electricity increased sharply in June in all Baltic states as a result of a failure in the NordBalt power interconnection between Lithuania and Sweden. 

He said: "Electricity became 13 percent more expensive month over month for domestic consumers due to limited throughput capacity. The price statistics of electricity has been very volatile in Estonia because our statistics does not include [the state-owned energy group] Eesti Energia's fixed price agreements; it only covers changes in the exchange price of electricity."

Prices rose most in yearly comparison in the segment of food, whereas the prices of energy, consumer products and services were cheaper than last year. The main contributors to the price increase in the food segment were fruit and meat products.

The prices of food raw materials have declined somewhat in the European Union internal market over the past few months, which should also be reflected in consumer prices within the next months, the economist noted.

Pert said: "The prices of accommodation services declined 30 percent on year, price increase in restaurants has likewise slowed down, and earlier rapid price growth of package holidays has also stopped. A survey by the Institute of Economic Research (Eesti Konjunktuuriinstituut) shows that estimates by businesses in the service sector are pessimistic and continued deflation is expected."

The government's strong stimulus has softened the economic downturn and thus also reduced the extent of price decrease, according to the economist.

Pert concluded: "Retail has quickly recovered after the last few months' big drop. General economic activity will be slow to bounce back, however, which will also hinder price increase throughout the second half of the year."


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Editor: Kristjan Kallaste

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