Estonian inflation sped up by food, electricity - analysts

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While generally describing February's consumer price inflation in Estonia as consistent with expectations, analysts speaking to BNS highlighted the role of food and electric energy as drivers of inflation.

"Food prices rose again in February by 6 percent, which is faster than before, as the earlier rises in global prices for food commodities fed through into Estonian end prices. Among the energy sources consumed by households, the highest rise from a year earlier was in the price of electricity, which increased by 27.4 percent, and also heat, which rose by 6.6 percent, while the prices of motor fuels remained similar to those of February last year. Electricity was 0.4 percent more expensive than in January," said Rasmus Kattai, head of the economic policy and forecasts division at the Bank of Estonia.

He pointed out that core inflation excluding food and energy prices fell to a low of 0.7 percent in February. "One factor in this is the drop in the prices of imported manufactured goods, which is a consequence of weak demand in the euro area as a whole. Core inflation was also restrained by services, especially by the cheaper prices for communications and public transport. Some acceleration in the prices of services may be expected in the near future as a result of wage rises."

"What consumers are worried about is increase in housing costs. It's honest to say that one won't escape increases in housing in the future either," Nordea's chief economist in Estonia, Tonu Palm, said, adding that the only solution was saving on costs and increase in incomes.

Palm added that reduced outside price pressure resulting from declining eurozone inflation will help restrain further price increases and there is no major price rise due for Estonia.

SEB Pank analyst Ruta Arumae said the CPI growth rate in February was in line with SEB's estimates. "In a paradoxal manner, the lowest point in annual inflation fell on January 2013," she said.

Arumae listed the ending of discount sales of clothing, a temporary increase in the price of gasoline and more expensive food as the reasons for the acceleration of inflation from January. "The price rise was rather broad based, and this may have to do with the effect from the price increase for electricity spreading," she said.

Swedbank chief economist Tonu Mertsina said CPI growth in Estonia was not expected to speed up significantly in the coming few months. "Although global commodity prices are moving higher and price increase expectations have deepened in Estonia, continued low economic activity in industrially developed countries is holding back a significant acceleration of the increase in consumer prices compared with last year," he said.

Violeta Klyviene, senior analyst for the Baltics at Danske Markets, told BNS February inflation surpassed forecasts because one had underestimated the so-called second round effect from higher electricity price.

Presuming that fuel prices will stabilize and weather will be favorable to agricultural crops on other markets in the spring, inflation in Estonia will stay close to 3.5 percent in the coming few months, said Kristjan Pungas, analyst at the Ministry of Finance.

He said an almost 8 percent reduction in the prices of communications services year on year has helped balance off increases elsewhere.

The increase in housing costs was known beforehand, but that other indispensable articles such as food, clothes, footwear and transport will rise 1.2 percent during one month and health care by 1.1 percent was an unpleasant surprise, said Heido Vitsur, expert at LHV Pank.

The fact that inflation in Estonia is double the inflation figure for the EU on average shows well how different a situation Estonia is in at the moment compared with most of the EU, but also how big a share of the rise in incomes and employment higher prices are taking away, he said.

"Unfortunately it's likely that the price increase in Estonia will continue to significantly exceed the price increase in Europe also in the coming months, thereby weakening our competitive position," Vitsur said.