Deflation has ended after close to a year

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Rasmus Kattai
Economist at Eesti Pank

Data from Statistics Estonia show that the consumer basket in May cost 0.1% more than a year earlier, and 0.2% more than in the previous month. Inflation also picked up in the euro area in May, climbing to 0.3%, which is still noticeably below the medium-term inflation target of the European Central Bank of below, but close to, 2%.

Prices rose in the consumer basket mainly because the oil price rose on global markets. This pushed prices for motor fuels 2% higher in May than in the previous month, and meant prices fell less in year-on-year comparison. The price of motor fuel is still relatively low and fuel prices are around 10% down on their average of the past four years. Heating energy and imported natural gas both continued to fall in price in May though, as the changes in the oil price pass through into those prices with a delay, and the earlier fall is still being passed through.

Prices for food without alcohol and tobacco fell by 0.2% in May, and rose by 0.9% with alcohol and tobacco included. One cause of the fall was the cheaper prices for food commodities on global markets, where prices continued their rapid fall in May. The FAO (Food and Agriculture Organization) price index is at its lowest level since September 2009 and the biggest falls in global prices were of 30% in the price of milk over the year, and 27% in the price of sugar. Russia’s restrictions on imports have also had a perceptible effect, though their impact on the dairy industry appears to have lessened somewhat as diary production volumes have increased in recent months and companies have reduced their inventory stocks. The same cannot be said about meat production though. Looking forward, the farm-gate price of milk may be pushed further down by the ending of production quotas in March.

Inflation will pick up in the short term but will remain low, and in the second half of the year it will be boosted by rising prices for energy and food. Prices for these groups of products have now been falling for more than a year, and both of them are passing the bottom of their troughs. Average consumer price inflation for 2015 as a whole will be zero. Eesti Pank will publish its latest economic forecast and inflation outlook in Estonian on 10 June.


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