Demand environment continues to be weak

Martin Lindpere, Eesti Pank, economist

According to Statistics Estonia, consumer prices remained unchanged in August compared to July. The CPI in Estonia decreased by 0.9% year-on-year, slightly exceeding the euro-area price decline of 0.2% (according to preliminary data).

August data show that the VAT increase of July was only partly reflected in the over-the-counter prices of goods. Thus, many enterprises incurred the tax rate rise and found ways to lower prices. Clothing and footwear, for instance, have cheapened by some 0.4% in two months. Nevertheless, the tax change increased prices in areas with less competition, such as utility services.

However, August is normally characterised by declining rather than rising prices due to seasonal factors. This year is not an exception - food cheapened month-on-month.
The demand environment is subdued by smaller incomes, which is why many companies are operating below their production capacity. Though the inventories of companies had been significantly reduced by the end of the second quarter, they are still too large in the light of recent years' poor sales volumes. Thus, downward price pressures prevail, especially in the sectors producing non-staples.

Eesti Pank will publish its new inflation forecast in October.