Estonian inflation was held back by lower oil price - analysts

Photo: PantherMedia / Scanpix

 The slowdown in Estonia's inflation in April resulted from a reduction in oil prices and lower transport costs, whereas more expensive food had an upward effect on inflation, analysts said in their comments to April CPI data.

Ruta Arumäe, analyst at SEB Pank, said the slowdown in inflation in April was expected. "Generally, price stability prevails, most prices practically did not change during the month. There are some individual areas where prices have been changed more, which are mostly subject to frequent monthly fluctuations and have not become more expensive on a longer-term basis," she said.

"As far as these things go some of the extraordinary price increases of March were reversed in April," Arumäe said. She added that catering establishments have hiked prices more than others in April, as people apparently have begun to eat out more often than earlier.

"The good news for consumers is that global oil prices came down significantly in April and partially that is reflected also in Estonian fuel prices and lower transport costs in April. Another good news is that housing costs have not increased further after the leap at the beginning of the year," said Arumäe.

The increase in the price of electricity at the beginning of the year is the main thing that keeps up the annual inflation figure, according to Arumäe. "The other main thing that is rising is food. Both are unfortunately unavoidable staple expenditures that affect all consumers, especially people with lower incomes," the analyst added.

"For the time to come we expect relative stability of inflation. Our annual inflation forecast is 3.3 percent, monthly the values will be to both sides of it," Arumäe said.

Kristjan Pungas, analyst at the fiscal policy department of the Ministry of Finance, said the slowdown in inflation in recent months has happened as a result of reduced impact from external factors.

As a result of the weakness of global economy, fuel prices have come lower and caused decreasing inflation in Estonia and the euro area alike. In April fuel was 6.6 percent less expensive in Estonia than a year ago, the ministry said.

"Prices in April were influenced also by seasonal factors -- the appearance on the market of fresh horticultural products and increases in the price of accommodation services that are characteristic of the start of the tourism season. At the same time, the prices of communication services kept declining in April, which together with a certain decline in the price of electricity balanced off the aforementioned price increases," Pungas said.

He said the deceleration of inflation may come to a halt in the coming months however because the price of oil came lower rapidly last spring and in the early part of last summer as a result of the European debt crisis and deterioration of the outlooks of the global economy.

The Bank of Estonia pointed out in its commentary that Estonia's inflation in April was the lowest in two and a half years. "In April developments in inflation were influenced by fluctuating energy prices. The price of electricity, which rose 28 percent compared with April a year ago, caused almost one-third of inflation," head of the Bank of Estonia's economic policy subdepartment Rasmus Kattai said.

On the other hand, inflation was held back by a reduction in the price of motor fuel.

Base inflation, or inflation not influenced by food and energy prices, stayed low at an annual rate of  0.9 percent in April. Base inflation was kept low above all by the cheapening of communications services and manufactured goods, including durable goods such as electronics and vehicles.

The Bank of Estonia in December 2012 forecast harmonized index of consumer prices (HICP) inflation of 3.6 percent for Estonia for 2013. In the first months of this year the rate of inflation has been lower than predicted. The central bank is scheduled to publish its updated economic forecast on June 12.

Nordea Pank chief economist Tonu Palm said inflation slowed down more than expected in Estonia in April. "If in transport costs the price reduction month on month was as expected, then in housing costs a decline took place instead of an expected minor rise. The year-on-year increase in housing costs meanwhile remains on a high level, coming down to 9.7 percent in April from 10.3 percent in March," Palm said.

Despite the deceleration of inflation the inflation gap between Estonia and the euro area widened a bit to about 1.9 percent, said Palm. Tentative HICP inflation in the euro area was 1.2 percent in April compared with 1.7 percent in March.

Swedbank chief economist Tonu Mertsina pointed at the deceleration of housing cost increases and reduction of costs related to transport as having the biggest effect on the easing of inflation in April.

"The price of electricity declined in comparison with March. The price change for electric energy is influenced, among other things, by the price of the CO2 quota," Mertsina said. He said the price of the emission quota has declined significantly in recent years and will probably decline further as a result of the European Parliament's refusal to back a Commission motion to remove a part of the emission credits from the market to prevent oversupply.

Even though food continues to account for a substantial portion of the price rise and the rate of annual increase in food remains above 5 percent, a reduction in the rate of increase has been observed in recent months. "Deceleration in the increase of the price of foodstuffs is supported by a reduction in the price of raw food on the global market. We aren't predicting an increase in the prices of raw foodstuffs for the near term," said the economist.

"Easing of external upward pressure on the prices of fuels and foodstuffs supports a further reduction in the pace of inflation in the coming months. Further decline in the price of pollution quotas could lower the exchange price of electricity. Consequently, the pace of inflation should continue to recede in the coming few months," said Mertsina.

The Estonian consumer price index climbed 3.1 percent in April compared to April 2012, whereas month on month a reduction of 0.1 percent took place, Statistics Estonia said on Wednesday. Goods were 2.1 percent and services 4.9 percent more expensive than in April 2012.