Inflation in January was driven by tax rises
Economist at Eesti Pank
Data from Statistics Estonia show that consumer prices in January were 1.4% higher than they were in December last year. The rise over the year was 4.7%. The consumer basket in the euro area fell in price by 0.4% over the month at the same time, while yearly inflation slowed to 2.8%.
The data for January indicate that most of the rise in VAT has been transmitted into the prices of food products in shops. Food prices were up by 3% over the month, while the prices of alcoholic drinks and tobacco products rose by an even faster 5%. The price of alcohol was affected by the rises in both VAT and excise. The rise in food prices was driven to some degree by prices rising for food commodities, and by the end of promotional sales in December.
The rise in VAT has only been passed through in part into the prices of manufactured goods and services. The manufactured goods and services that are about half of the consumer basket rose less in price in January than might have been expected in response to the increase in VAT. The full impact of the rise in VAT will consequently only be felt in full in prices in the coming months. Seasonal factors mean that clothing and footwear and tourism services are usually cheaper in January. Some companies will have to absorb the rise in taxes themselves though, as consumers are now having to spend more money on essentials.
The downwards trend in inflation will continue despite the rise in taxes, as weak economic activity does not foster high inflation. The ending of electricity as a universal service in May may also bring inflation down if the market price of electricity is lower in the spring than it is now. Eesti Pank forecasts that inflation in 2024 will average 3.4%.
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