Inflation low in April compared to a year ago

Martin Lindpere, economist of Eesti Pank

According to Statistics Estonia, the cost of the Estonian CPI basket declined 0.7 per cent in April, month-on-month. Compared to April 2008, the price level increased only 0.3 per cent. Over the past six months, the price level in Estonia has decreased 2.7 per cent.

According to preliminary estimates, external inflation was at a record low, being only 0.6 per cent higher in the euro area compared to a year ago. The last couple of weeks have seen signs of slight optimism, which gives reason to expect that the worst of the crisis may be over. Further contraction of the global economy depends on the restructuring necessary for economic adjustment.

The decline in thermal energy and motor fuel prices has been one of the key factors dampening inflation in the last six months. However, this period will come to an end soon, as the price of oil has picked up. The past six months have shown that global price falls do not pass through to the prices of motor fuel in Estonian gas stations.

Strong economic contraction increased stocks in Estonia considerably last year. Although the stocks have not grown any further lately, they are still quite large given the weak demand. Thus, downward price pressures persist.

The current excess production capacity in some sectors allows lowering the cost of production. Even so, the confidence indicators of entrepreneurs and manufacturers are no longer on a downward trend.

The lower cost of production inputs, such as labour, partly also passes through to the cost of production but this occurs over a longer period. Eesti Pank expects the average annual price fall to be 0.5 per cent this year. Once the economy recovers, the period of price decline will come to an end.