Analysts: Estonian inflation not likely to accelerate in near term

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Inflation in Estonia is not expected to speed up significantly after the monthly inflation of 0.7 percent and annual inflation of 3.4 percent recorded in January, analysts said in their comments to the January consumer price index (CPI) figures published on Thursday.

As expected, higher price of electricity contributed the most to the 0.7 percent increase in CPI in January compared to December, Swedbank Estonia chief economist Tõnu Mertsina said. As a result of increases in excise duties and ending of seasonal discount sales, inflation was supported also by higher prices for alcoholic beverages and tobacco, he added. Partially the effect from the above was offset by the introduction of free public transport in Tallinn and extensive discount sales of clothing and footwear at the beginning of the year.

Mertsina said that both the price of crude oil globally and the price of motor fuel on the Estonian market have moved up somewhat in recent weeks despite relatively weak demand on global markets compared with offer. "As economic activity picks up, the increase in fuel prices can be expected to continue," said Mertsina. "Changes in the consumer price index depend substantially on economic activity both globally and in the eurozone, and further down in Estonia. No significant acceleration of price increases is to be expected in the coming few months."

Mertsina pointed out that starting from spring 2012 the increase in administratively regulated prices has slowed down in Estonia while free market prices have been moving up faster. He said that increases in the latter category are even more notable now, as from January 2013 onwards the price of electric energy is counted as a non-regulated price. The price of electric energy accounts for 3.9 percent of CPI.

Tonu Palm, chief economist at Nordea Pank, said that the increase in the price of electricity is set to have a long-term effect on inflation. "At the same time, owing to today's modest domestic demand the pressure on prices is smaller," he added.

Just like Mertsina, Palm pointed at the increase in housing costs resulting largely from the higher price of electricity, as well as the alleviating effect from cheaper transport as a result of both Tallinn's free public transport and stronger euro, along with seasonal discounts on clothing and footwear.

Heido Vitsur, expert at LHV Pank, said in his comments to BNS that January's monthly inflation of 0.7 percent was in line with expectations. "The 3.4 percent price rise year on year however was pleasantly lower than one could fear. At the same time, the relatively moderate CPI rise in January doesn't mean that the rise in the price of electricity will not start pushing the prices of the rest of the goods quietly higher too in the coming months," Vitsur said.

"It can be hoped that the European economy's remaining constrained will not allow inflation to speed up significantly in Estonia in the first months of this year," said Vitsur.

Ruta Arumäe, analyst at SEB Pank, described January inflation as moderate despite the electricity price rise. "The price of electricity grew 24 percent in connection with the opening of the market. As a result, almost one percent in the overall increase of the consumer price index originated in more expensive electric energy -- more precisely 0.9 percent," said Arumäe.

"Annual inflation measured 3.4 percent, being on the same level as a month ago despite the fact that during the month prices increased 0.7 percent, more than in any separate month since March 2012," said Arumäe. "It means that the electricity price rise occurred at a very favorable time, when base inflation has kept declining and there's not a lot of other price pressure."

The forecast by SEB Pank is that inflation in 2013 will end up at a bearable and reasonable level, below the inflation rate of 2012.

Kristjan Pungas, analyst at the the fiscal policy department of the Ministry of Finance, said that inflation in the euro area contracted to 2 percent in January according to tentative figures as a result of the deceleration of the price increase for fuel. "In January inflation was slower than forecast. The impact from the opening of the electricity market was curbed by seasonal discounts and the cheapening of some services."

The higher excise duty rates for alcohol and tobacco will show more of their effect next month when the stocks accumulated at the end of 2012 have been used up, said Pungas.

No indirect impact from the higher price of electricity was recorded on other goods in whose price the share of electricity costs is bigger, said Pungas. "At the same time, if competition permits it cannot be ruled out that [the effect from higher electricity price] will be added in the coming few months," he said.

Rasmus Kattai, chief of the economic policy sub-department at the Bank of Estonia, said that the share of electricity in production costs does not offer grounds for a broad-based price rise. "As expected, a one-off leap in the consumer price index materialized in January," Kattai said. "Leaving electricity aside, the consumer basket became cheaper by approximately 0.2 percent," he said.

The price of the consumer basket of energy and food, or base inflation, came down one percent in January, largely as a result of a 9.9 percent drop in transport costs, Kattai said.

According to the Bank of Estonia forecast, the average rate of increase in the harmonized consumer price index will be 3.6 percent this year provided that no big changes take place in commodity prices. Inflation in the euro area slowed down to 2 percent in January, according to preliminary figures by Eurostat. A joint forecast of euro area central banks suggests that average inflation in the euro area this year will be in the range from 1.1–2.1 percent.