Slower inflation is in line with lower economic growth

Rasmus Kattai
Rasmus Kattai
Head of the Economic Policy and Forecasting Division, Eesti Pank

Data from Statistics Estonia show that inflation slowed in October from 2.1% to 1.5% while prices were 0.3% lower than in September. The slowdown in the growth in consumer prices in the second half of the year is in line with the reduction in economic activity in Estonia. This is also one reason why the fall in inflation is broad based, taking in food and energy prices as well as the remaining consumer basket that accounts for core inflation.

Price rises were also affected by low rates of inflation in Estonia’s trading partners, which passed through into Estonian prices through imports. Preliminary assessments show that inflation in the euro area slowed to 0.7% in October, with the first fall in energy prices for three years playing a central role. In several euro area countries inflation was also reined in by the decline in the impact from tax rises that were brought in to improve budget balances.

The annual rate of rise in energy prices slowed to 3.3% in October. The fall in the global oil price and a strengthening of the euro meant that the price of natural gas was down by 7.2% and that of heat energy by 2.3%. For the same reason, motor fuels continued to fall in price and were 7.6% cheaper than a year earlier. The main driver of the rise in energy prices was electricity, which was 30% higher than in October 2012.

Although alcohol and tobacco prices have risen because of tax increases at the start of the year, food price inflation as a whole fell in October, with prices for fruit and vegetables retreating from the high levels they reached in the summer.

Core inflation in October was low and fell from 0.6% to 0.4%. Inflation in prices of services was restrained by free services in public transport in Tallinn and in higher education, without which services inflation and thus consumer price inflation overall would have been 0.5 percentage points higher. The impact of free services will steadily pass out from the inflation calculation during 2014, and core inflation will rise in consequence. Prices for communications, which have restrained headline inflation in recent times, rose in monthly comparison in October for the first time since 2011.

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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