Inflation in June was driven by electricity price growth
Head of the Economic Policy Division, Eesti Pank
Data from Statistics Estonia show that the June CPI rose 0.5% month-on-month and 3.8% year-on-year. The initial estimate of Eurostat shows that prices in the euro area as a whole had increased 1.6% compared to the same time a year ago.
The volatile price of electricity, which was 38.4% higher than a year ago, was the largest contributor to CPI growth. Electricity price increase made up about four-fifths of the monthly increase in the cost of the consumer basket. The growth in the price of electricity was mostly caused by insufficient connection to cheaper electricity producers in Nordic countries. The problem should be alleviated next year, when an additional electric cable will be opened between Estonia and Finland.
The cost of food went up by a total of 4.3% compared to June 2012 and the price of fresh fruit and vegetables increased the most. At the same time, the price of imported fuel continued to go down. Motor fuel was 2.7% lower than a year ago owing to a decline in the cost of oil. Core inflation (without the price of energy and food) picked up to 1.4% in June because of seasonal factors. The 6.4% increase in the cost of recreation services contributed the most to the price increase. On the other hand, core inflation was slowed by the 10.2% cheapening of communications services.
Looking ahead, the risk of both imported and domestic price pressure has increased. The decline in the commodity prices has slowed over the past few weeks, because the outlooks for global growth and demand have improved and this may cause the prices of imported commodities to turn to a rise. The risk of domestic inflation is related to the pick-up in unit labour cost growth in the first half of the year. This has the strongest effect on the services sector, which is less open to external competition and has a larger share of labour costs. A recent Eurostat's comparison shows that the price level of services sold in Estonia is 62% of the EU average whereas that of goods makes up 84%.
According to Eesti Pank’s economic forecast published on June 12, the consumer price inflation of 2013 will be 3% in Estonia.
The primary role of the central banks of the euro area is to maintain inflation in the euro area at below but close to two percent over the medium term. The fact that Estonia's inflation is slightly higher than the euro area average is to be expected and is a consequence of faster economic growth and harmonisation of relative incomes with those of the euro area.
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