Estonia's May inflation basically in line with expectations - analysts

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The annual rise in Estonian consumer prices in May was basically in line with expectations, matching exactly some forecasts and differing only slightly from others, analysts of commercial banks and the Finance Ministry said.

«The May inflation exactly matched expectations and is fully in keeping with our annual forecast. We still expect inflation to reach 3.3 percent this year,» SEB Pank analyst Ruta Arumae told BNS.

In her words, housing expenses which declined during the past month thanks to a drop in the price of electricity are carrying less and less weight in annual inflation. The prices of food, the second essential spending category, meanwhile rose the most in May and in connection with this the cost of eating out increased as well. «I don't believe the food price rise will accelerate markedly in times ahead, but it will certainly remain a key inflation factor,» Arumae said.

«Prices of imported goods have declined whereas prices of domestic goods have risen. This indicates that expenses of local companies have increased at a faster rate than productivity and they're trying to compensate for this by raising prices,» she observed.

On the whole, the rate of inflation will remain modest and SEB Pank expects continued stability in coming months, Arumae said.

Chief economist at Nordea Pank Tonu Palm likewise described the May inflation figure as in line with expectations. «We expected a slight upwards correction, to 3.21 percent, in annual inflation,» he told BNS.

The nearly 1.6 percent increase in food prices against the previous month was higher than usual, Palm said. The expected alleviation was provided by lower energy prices which influenced housing and transport expenditure.

«In our fall forecast last year we singled out slowing of the price rise as an economic challenge in 2013. Eurozone inflation is headed lower in 2013 and this raises the question to what extent Estonia is able to match the slowdown,» Palm said. «Price rise has decelerated in Estonia but not much. From January to June consumer prices in Estonia rose by 3.4 percent compared to 3.8 percent growth in the second half of last year.»

«Although it was known from the last day of May that price increases during that month raised annual inflation in Europe from 1.2 percent to 1.4 percent, and we also know that vegetables and fruits become more expensive in spring and that price rises in Europe are reflected in Estonian price levels, it's still a bit saddening that annual price rise here accelerated in May as much as in Europe,» Heido Vitsur, an expert at LHV Pank, told Estonia. However, it did not come as a surprise, he added.

In predicting the following months' inflation, it has to be taken into account that domestic price rise factors will remain stable in coming months, but the eurozone remains in recession and several branches of economy in Europe are experiencing deflationary pressure, Vitsur said. Because of that the measures already taken and yet to be applied to give a boost to the economy, easing of the austerity policy included, will begin to push the price rise towards the 2 percent level as the economy recovers, he said.

«We forecast 3.7 percent inflation for this year and in light of the above have seen no reason to revise it so far,» Vitsur said.

«The rise in consumer prices was slightly bigger than expected in May, 3.3 percent compared to the same month of the previous year and 0.2 percent compared to April,» chief economist at Swedbank Tonu Mertsina said in a comment on the figures released on Friday.

In his words, the price rise was driven by food and housing expenses which increased the most in annual comparison. The rise in global food prices pushed up Estonian prices as well. World market prices of vegetables and fruits and beef and poultry are expected to increase at a faster than average rate this year. «Over the first five months of the year the prices of food raw materials have come down by more than 1 percent, but food prices in Estonia have risen by almost 6 percent,» he observed.

Housing expenses were influenced the most by the 25 percent increase in the price of electricity. However, the rise in electricity prices has been gradually slowing since the beginning of the year. The price of gasoline decreased in May both in monthly and in annual comparison. According to Mertsina, global oil prices are not expected to rise in coming weeks. «The prices of transport services should therefore remain below last year's level also in June. Free public transport for residents of Tallinn is also influencing the drop in the prices of transport services,» Mertsina said.

Consumers took a fairly optimistic view of their economic situation in May. Consumption was supported by fast real wage growth and a seasonal increase in employment.

According to Mertsina, world raw material prices ought to remain below the previous year's levels in coming months and since domestic demand in Estonia also is rather likely to stay low the pace of inflation should slow down in the summer months.

«Compared with the Finance Ministry's spring forecast, which projected 3.4 inflation for this year, the May inflation was slightly slower due to oil prices that were lower than expected,» analyst with the ministry's fiscal policy department Kristjan Pungas said.

Pungas said price rise in May was driven by the increase in food prices which was partly offset by a drop in electricity and gas prices. «Eurozone inflation accelerated to 1.4 percent according to preliminary estimates,» he noted.

The rise in food prices is caused by the continued price increase of fruits and vegetables which is characteristic of whole Europe, the analyst said. «Owing to unfavorable weather conditions, imported garden produce is nearly one third more expensive than a year ago, and because of that food accounted for almost a half of the consumer price rise in May. Despite acceleration of wage growth, base inflation that reflects price changes of services and manufactured goods has remained low in recent months.»

The Estonian consumer price index in May was 3.3 percent higher than in the same month a year ago and 0.2 percent higher than in April, Statistics Estonia reported on Friday. Goods were 2.8 percent and services 4.3 percent more expensive than the year before.