The effect of lower excise on alcohol will depend on shopkeepers

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Kaspar Oja
Economist at Eesti Pank

Consumer prices were on average 2.4% higher in June than a year earlier. Inflation, which had been 3.1% in May, was brought down by energy prices rising more slowly. Prices will start to be affected in July by the cut in the rate of excise on alcohol.

Inflation should be affected in July by the excise cut, but the size of the effect will depend largely on the behaviour of merchants. The rise in excise on beer in 2017 pushed prices up by more than the tax rise because the price mark-up was also increased (see Figure). As the economy is performing well with low unemployment and rapidly rising wages, the cut in excise will not necessarily be accompanied by a reduction in mark-up, and so it may have a reduced impact. The Eesti Pank forecast expects the excise cut to reduce the rate of inflation by 0.2 percentage point this year.

Inflation for motor fuels and energy for households slowed, and this left inflation around 0.7 percentage point lower than it was in May. Prices for petrol and diesel rose only slowly, and the price of petrol actually fell. The main price falls for energy consumed by households were for electricity and heating. Fuel prices tend to react quickly to changes in the oil price, but the price of energy forms like gas consumed by households react with something of a lag. The price of gas is related to the price of oil, but it usually reacts to fluctuations in the oil price only some time later.

 

For further information:
Eva Vahur
Public Relations Office
Eesti Pank
668 0965, 5330 0619