Rising food prices were balanced in May by cheaper fuel
Economist at Eesti Pank
Data from Statistics Estonia show that the annual inflation rate rose to 3.3% in May, and that prices were 0.2% higher than in April. The flash estimate shows the annual growth in the consumer price index for the euro area as a whole at 1.4% in May.
Inflation was affected most in Estonia by a sharp rise in the prices of individual food items even though global prices for food commodities are lower than they were half a year ago. Prices for fruit were 4.9% higher than in April and vegetable prices were 7.3% higher. Fuel prices continued to fall in May, however, and motor fuels were 4.2% cheaper. Core inflation, which is the rise in prices for other goods and services once energy and food are excluded, ran at 1% over the year.
Results for retailers in the first quarter show that labour costs have risen faster than profits. This could in future cause an increase in domestic price pressures due to the desire to restore profitability. However, companies have so far been restricted in their ability to raise prices, as is shown by a widespread fall in sales margins for merchants and a longer sales period than in the same quarter last year.
The recent forecast by the European Central Bank expects inflation to remain low in the euro area this year and next year. For Estonian consumers this should first of all mean lower inflation for manufactured goods. The main cause of the difference in the inflation rates in Estonia and the euro area has been the rise in electricity prices following the opening of the local electricity market, which added around one percentage point to the annual inflation rate for Estonia in May. The difference between Estonian inflation and that of other euro area countries will decrease next year.
Eesti Pank will publish its latest economic forecast in Estonian on 12 June.
The primary role of the central banks of the euro area is to maintain inflation in the euro area at below but close to two percent over the medium term. The fact that Estonia's inflation is slightly higher than the euro area average is to be expected and is a consequence of faster economic growth and harmonisation of relative incomes with those of the euro area.
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