Faster inflation is mainly due to food prices

Keywords: 
Sulev Pert
Economist at Eesti Pank
  • Inflation is in line with an increase in economic activity, as rising demand makes it easier for companies to raise prices
  • Inflation in the euro area rose in August mainly because of higher prices for energy and food
  • High food price inflation can be found in many countries that previously suffered from the disappearance of the Russian market

Data from Statistics Estonia show that consumer price inflation rose in August, reaching 3.9% over the year. Food prices were 7.5% higher than a year earlier, energy prices were up 5.9%, but core inflation slowed to 1.6%. The biggest drivers of inflation with two groups of goods, dairy products and beer, which together added one percentage point to inflation.

It has been easier for merchants to raise prices because demand has grown strongly, and economic growth is above the long-term capacity of the economy. Core inflation was leading August by a 3.8% rise in services prices, which has become broadly based although prices fell for industrial goods. The price level of industrial goods was 0.6% down over the year, one reason for which may be that the euro appreciated against the dollar. The start of the year the euro had appreciated by more than 10%.

Inflation in the euro area rose in August to 1.5% mainly because of prices for energy and food. Food prices have risen to historically high levels, though they still remain below the peak reached in the previous cycle of price rises at the end of 2012. Food price inflation of close to 4% can be found in those Eastern European countries that previously suffered from the disappearance of the Russian market. Inflation has been higher in Lithuania and Estonia than in other euro area countries, because rises in food prices have been exacerbated by strong rises in excise rates for alcohol.

Inflation should fall in the second half of the year because of the high reference base and seasonal factors. Average inflation in 2017 will still remain above 3%.

Inflation in Estonia and euro area

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