The moderate fall in consumer prices will probably continue in the second half of the year
The consumer price index fell by 0.4% in the month of April and was 0.8% lower than a year earlier. Estonia last experienced deflation in 2016. Energy prices were down 9% over the year while food prices rose by 1.2%, but the prices of manufactured goods and services remain at almost the same level as a year earlier.
The large fall in April was caused by lower oil prices on global markets and also by lower prices for electricity.
The price of crude oil fell substantially over the year on global markets, declining by 66% from 73 dollars a barrel to 25. If the oil price remains low for a longer time, it could take two percentage points off inflation. Lower energy prices affect the prices of many goods and services with a lag.
The food products that rose most in price in Estonia and in the whole of the euro area were fruit and meat products. This should start to be offset by lower prices for butter and dairy products.
Core inflation in manufactured goods and services has slowed because of both demand and supply-side factors. On the demand side, the prices of rent services and tourism services have been particularly reduced by the recession. Prices for tourism services in Estonia have in recent years risen at one of the fastest rates in the euro area, but now they may fall back as the tourism sector has particularly suffered from the coronavirus.
Inflation for services was lower in April because not all services were available under lockdown, and so changes in their prices cannot be measured. In consequence Statistics Estonia assumed that price levels have not changed for many services, though services prices generally tend to rise in advance of the summer holidays.
The moderate fall in consumer prices will probably continue in the second half of the year. Price developments will depend very much on how rapidly economic activity recovers and how demand for oil increases on global markets.
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