Price pressures eased off in December
Economist at Eesti Pank
- The consumer price index was 0.3% lower in December than in November
- Average inflation in 2017 reached its highest for four years
- Inflation was primarily driven last year by commodities prices
Data from Statistics Estonia show that yearly consumer price inflation slowed in December to 3.4%. Prices were still driven upwards by food and energy prices, but prices in the rest of the consumer basket rose modestly. Month-on-month inflation fell in December mainly because of seasonal factors, including promotional prices for alcohol and cheaper rents. Inflation has remained modest in the euro area at 1.4%, despite economic activity picking up.
Inflation in Estonia was affected to a large extent last year by price changes in the external environment. Reduced output raised prices on global markets most for dairy products, especially butter. The rise in producer prices for food in Europe has clearly slowed in recent months though. Producer prices for butter for example have now fallen back to the levels they were at in early 2017. Retail prices for dairy products fell by 1% over the month in December in Estonia. As prices for food commodities have been volatile, a prolonged period of contraction for retail prices of food cannot be ruled out.
The higher level of economic activity in Estonia in 2017 also favoured price increases. Labour costs rose last year for companies in Estonia at one of the fastest rates in the euro area, and the Estonian unemployment rate fell to near to its historical record low.
In the first half of 2017, Eesti Pank forecast consumer price inflation for the year of 3.2%, but the actual rate reached 3.4%. Inflation exceeded the forecast mainly because of the acceleration in the rise in food prices. At the same time the oil price was pushed upwards by the recovery of the global economy and OPEC’s production cuts. The oil price reached its highest level of recent times in December 2017, passing 65 dollars a barrel. The average rate of inflation expected in 2018 is 3.2%, assuming no very large changes in the oil price level.
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