Inflation was slowed in March by coronavirus

Sulev Pert
Sulev Pert
Economist at Eesti Pank

Data from Statistics Estonia show that the rise in consumer prices slowed in March to 0.9% over the year. The price level dropped by 0.7% over the previous month.

Consumers stockpiled food products and other essentials in the beginning of March. Firms did not take advantage of the emergency and did not raise their prices. Moreover, the prices for most food and drink came down in March and were on average 1.1% lower than in February.

Weakness in economic activity around the globe pulled import prices down. The price of oil fell sharply on world markets, as the spread of the virus was accompanied by increasing worries about global demand. Prices have also been brought down substantially in recent months by electricity being cheaper in response to the favourable weather. Prices of both motor fuels and electricity fell by 5% in March over the month. The fall of import prices may become even more pronounced when consumers prefer to postpone purchases of durables like cars in response to the crisis.

However, the fall in the overall price level will remain largely contained in the short term. Prices did not fall extensively during the early part of the previous economic crisis either, even though the fall in demand provoked a recession. Such a fall in demand should put more downward pressure on prices than will come from the current fall in output that has mainly been caused by the supply restrictions. Prices for services were particularly sticky during the financial crisis of 2008, and the rise in them slowed only after a lag of half a year. Rising unemployment and falling incomes could cause rent to fall the most among services. Rents fell by 31% on average in 2009.

Inflation for some intermediate and consumer goods be boosted in the second half of the year by price pressures coming from interruptions to supply. Inflation may gain momentum if quarantine lasts for a prolonged time or if a significant share of the workforce in some sectors falls ill, as those who are ill are hard to replace quickly. Labour intensity is above average in trade and transport. The current price statistics do not indicate any interruptions to supply in Estonia or in the euro area as a whole.

The government decided to cut excise on diesel fuel, electricity and gas from May. The cut in excise rates will slow inflation by around 0.3 percentage point.

Prices may become more volatile in the coming months for statistical reasons. The price statistics from March did not yet take account of how quarantine affected consumer prices. Some consumer goods and services are made unavailable by quarantine, and so changes in their prices cannot be measured directly. This is a challenge for compilers of statistics.


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Mart Siilivask
Eesti Pank
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