Prices stopped falling in August after declining for more than two years
- The rise in excise aided the exit from deflation
- Prices for food have risen rapidly in recent months
- Prices will continue to rise moderately in the second half of the year
Consumer prices were 0.3% higher in August than a year earlier. This was the first rise in prices after a decline that has continued for more than two years. The main cause of it was the higher excise rates that were introduced at the start of the year and the disappearance of the impact from the large drop in energy prices. The rise in the Estonian harmonised index of consumer prices was 0.8% in July, while that in the euro area was 0.2% in the same month. Inflation was higher than the euro area average mainly because of the rises in excise here.
There has been a change in recent months in the structure of inflation as higher food prices have started to lift prices, while core inflation, which measures price changes for industrial goods and services, has slowed at the same time due to slower growth in prices for services. The yearly rise in food prices reached 2.3% in August, though prices for agricultural commodities on the single European market remain low. Food prices rose because of higher excise on alcohol and tobacco, which had a total effect on the consumer price index of 0.6 percentage point. Among processed food products, milk and dairy products have again seen prices fall. Fruit and vegetables were also cheaper in August than a month before, having risen rapidly in price in July.
The difference between the consumer price index (CPI) and the harmonised index of consumer prices (HICP) used for comparison with the rest of the euro area widened in July 2016 to a record 0.8 percentage point. The HICP contains a relatively larger share of services consumed by tourists, and also a larger share of alcoholic drinks and tobacco products. Energy provides a smaller share of the HICP than of the CPI. Prices have risen relatively rapidly this year for tourism services and alcohol, but energy prices have fallen, and this has stretched the difference between the HICP and the CPI. The difference between them was smaller last year because of rises in energy prices.
Eesti Pank forecasts that consumer prices will continue to rise throughout the second half of the year, but the rise will still be moderate. The low reference base for energy prices will boost inflation until the first months of next year. The price level of imported raw materials is still low on global markets and modest levels of economic activity do not indicate any additional demand-side price pressures.