Banks: Inflation expected and may continue in second half of year ({{commentsTotal}})

Banks agree that the July 1 excise duty slash should reduce inflation further, but by how much is open to debate.
Banks agree that the July 1 excise duty slash should reduce inflation further, but by how much is open to debate. Source: Anna Aurelia Minev/ERR

Friday's inflation figures for June, which showed a decrease in the year-on-year (y-o-y) rise to below 3 percent, came as no big surprise to both the central bank and two of the high street banks. However, the much-anticipated effects of the July 1 slashing of the alcohol excise duty will not be clearer until later.

Prognoses on this have been towards a damping down on inflation, though the Bank of Estonia believes it depends on how drinks merchants respond with their pricing.

Statistics Estonia announced that Consumer Price Index (CPI) inflation was 2.4 percent y-o-y to June 2019, below the expected level of 3 percent through the year.

Excise duties on beer, cider and strong alcohol were slashed by 25 percent on July 1, following several years of successive rises.

Bank of Estonia reaction

Inflation in Estonia is likely to be affected by the cut in excise duty on alcohol right away, though the extent depends on vendors, according to, Kaspar Oja, Bank of Estonia economist, BNS reports.

"The rise in excise on beer in 2017 pushed prices up by more than the actual taxation rise because price mark-ups were also increased," he said.

"As the economy is performing well, with low unemployment and rapidly rising wages, the cut in excise will not necessarily be accompanied by a reduction in mark-up, so the impact may not be great. In fact the forecast by the Bank of Estonia expects the excise cut to reduce the rate of inflation by 0.2 percentage points this year," he continued.

Inflation on motor fuels and household energy has slowed, meaning inflation was 0.7 percentage points lower than it was in May. Fuel rose prices only either slowly, or, in the case of petrol the price actually declined. Electricity and heating were the main components in household inflation drops.

"Fuel prices tend to react quickly to changes in the price of oil, but with the price of energy in forms like gas consumed by households there is something of a laf. The price of gas is related to the price of oil, but it usually reacts to fluctuations in oil price only some time later," Oja added.

SEB: Inflation will fall thanks to excise duty cuts

High street bank SEB analyst Mihkel Nestor said the excise duty will lead to a downward trend in inflation from July.

"The price of fuel remaining at a lower level compared with last year helped to slow down inflation in June. Since last year, the rise in the price of oil continued almost until the end of October (and stopped after that-ed.); this factor should also curb inflation in a couple of months from now," Nestor told BNS. 

The analyst noted, however, that energy prices have been rather volatile this year so far, which makes it difficult to predict the precise rate of inflation.

Nestor also pointed out that services in the domestic market, such as eating out and leisure activities, are becoming significantly more expensive, as a result of rapid wage increases.

Swedbank: Inflation in June was as expected

"Almost half of the price increase resulted from a rise in mandatory expenses ‒food and housing," said Swedbank senior economist Liis Emik in a press release, BNS reports.

"Food prices were boosted primarily by vegetables, whose price rise was accentuated by the dry summer of 2018. The impact of last year's adverse weather should diminish in its effects on CPI in the next few months, as this year's crop reaches maturity," she added.

Swedbank concurred that fuel and rents had made an impact on the rise in housing costs.

Owing to robust demand, rents have continued to increase at a rate of about 7 percent per year, according to Statistics Estonia.

Services related to entertainment and leisure time also accounted for one-third of the price rise. This, according to Elmik, is a result of strong demand on the one hand, and a rapid increase in labor costs on the other.

According to a survey conducted by Swedbank in spring, one in five people eligible for a reimbursement of income tax planned to take advantage of their windfall either with a vacation or in spending money on hobbies and interests.

The prices of vacation trips grew by about a third compared with the same month last year.

Swedbank also noted global oil prices falling was the factor behind lower fuel inflation, or deflation in the case of petrol.

"The price of vehicle fuel was affected by a reduction in the price of oil. This was caused by doubts hanging over the global economy. To underpin the price of oil, OPEC and Russia decided to go on with production quotas at the beginning of July," Elmik added. 

According to Elmik, price rises should decelerate further in the second half of the year, again, thanks in part to the excise duty cuts.

The average price increase in Estonia through the first half of 2019 was 2.6 percent, significantly less than last year when the figure was 3.4 percent.

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Editor: Andrew Whyte



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