A cheaper euro will affect inflation in the coming months

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Rasmus Kattai
Economist at Eesti Pank

Data from Statistics Estonia show that consumer prices were 0.5% higher in April than in March, but the cost of the consumer basket was 0.1% lower than a year earlier. The fall in prices was mainly slowed by seasonal rises in food prices, though another factor was that global energy prices stopped falling. Prices stopped falling in the euro area after doing so for four months, and they remained where they were a year ago.

The first signs appeared of an increase in the hitherto weak price pressures from the external environment that have restrained inflation in Estonia. The latest data show that import prices as a whole fell in March both in Estonia and in the rest of the euro area, mainly because of lower energy prices, but import prices for production inputs and manufactured goods started to rise in the euro area. The depreciation of the euro played an important role in this. A steady pass-through of higher input prices into consumer prices is expected in the coming months, and this will lift inflation.

Domestic price pressures have remained weak as inflation in services has remained at 1% for the past six months. Service price inflation is being restrained by falling prices for transport services as prices for motor fuels are low, while administrative inflation is still low following the introduction of free higher education. Prices for leisure services and household services, including rent, have risen by more than the average.

The fall in consumer prices is encouraging an increase in consumption, which has been the main motor of growth in the economy. Falling prices meant that growth in real wages reached 5.8% in the fourth quarter of last year, leading to private consumption growth of about the same amount. Retail statistics indicate that the strong growth in private consumption continued in the first quarter of 2015.


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