Cheap oil will lower the price level in the months ahead
Economist at Eesti Pank
- he fall in the price level was again mainly due to cheaper energy
- Services prices are rising, reflecting wage and inflation pressures in Estonia
- The price of industrial goods has not reacted to rises in incomes and demand
- The consumer basket will become more expensive in the second half of the year
Data from Statistics Estonia show the price level of the consumer basket was the same in April as a month before, though average prices for goods and services were 0.8% lower than in April last year. The average yearly price change in the member states of the euro area was also negative in April, with the harmonised consumer price index for the euro area down 0.2% over the year.
Consumer prices in Estonia mainly reflect the consequences of the fall in the oil price over the preceding 12 months from 65 dollars a barrel in April 2015 for crude oil on global markets to 43 dollars a barrel this year. Since the middle of January the price level of oil has risen steadily and the forecourt prices of motor fuel have climbed by 9% in that time. Fuel excise was raised from February, which accounts for part of the rise in fuel prices in the first months of the year.
Consumer price inflation without energy prices reached 0.6% in April. The main rise in food prices was in the price of alcohol. Prices of fruit and vegetables have been as volatile as usual this year, rising fast in the first months of the year and then falling in April. Falling vegetable prices accounted for a large part of the deeper fall in prices in April. For the second year in a row, prices were down for dairy and meat products, which make up one third of the consumer basket. The farm-gate price of milk has fallen further in the European Union and there is no clear sign yet on the world market that it will stop doing so.
Conditions in the Estonian domestic market are causing service prices to rise, as wages paid out have risen by an average of around 6% this year and unemployment fell at the end of last year to 6.4%. The unemployment rate has fallen below the estimated natural rate of unemployment and it is becoming harder and harder for companies to find staff, which is causing wage and inflation pressures in the economy. This is indicated by the rise of 2.8% in prices for services in April once the effect of higher education reform is removed. Rapid rises in incomes and in demand have not lifted the prices of consumer goods though, and in April they remained at the same level as a year before. This is despite the higher import prices caused by the depreciation of the euro.
Deflation will continue in the coming months because of the earlier fall in oil prices, and consumer prices are likely to turn upwards in the second half of the year. Eesti Pank will publish its latest economic forecast and inflation outlook in Estonian on 8 June 2016.
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