Inflation will be affected in the short term by the rise in the oil price
- Higher prices for dairy products helped push food prices up by 8.9% over the year
- The oil price climbed above 60 dollars a barrel
- Core inflation, which covers the prices of manufactured goods and services, was relatively low at 1.3%
Yearly growth in Estonian consumer prices stood at 3.8% in October according to Statistics Estonia. Consumer prices rose by 3.3% in the first ten months of the year. The average rise in consumer prices in the euro area slowed to 1.4% in October.
The fastest rise in prices over the year in Estonia has been in food prices, especially for dairy products and also for alcohol. The rise in prices for food commodities in the European Union market slowed a little in October, and the producer price index for butter and milk started to fall. This indicates that food price inflation could come down in Estonia too after some time.
Inflation was pulled back to 3.1% in October by lower electricity prices, though in the coming months the price of energy will start to be affected by higher oil prices on the global market. The price of a barrel of oil was clearly moving upwards in October, and by the end of the month it had passed 60 dollars. Oil is currently relatively cheap, as a barrel cost over 140 dollars in the middle of 2008. Were the price of crude oil to climb to, say, 100 dollars, a litre of petrol would cost more than 1.5 euros. A litre of petrol cost 1.1 euros in 2008, but the euro has depreciated by 20% against the dollar since then, while excise and related VAT have risen by 60% over the intervening years. Taxes will account for near half of the price of petrol next year.
A rise in the oil price is usually followed over the next year by rises in other energy prices, for natural gas and heating, and the combined effect is that a rise of 10% in the oil price lifts inflation by around 0.3 percentage point. A sharp rise in energy prices would hit the welfare of consumers primarily, by restraining growth in real wages and consumption. GDP growth will not be particularly affected by the oil price rising at its current price level, as a higher oil price equally supports domestic oil production.
Eesti Pank will publish the next inflation forecast in December.
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