Central Bank: Rising fuel costs expected to affect other prices

TALLINN - According to Lauri Matsulevitš, an economist at the Bank of Estonia, one of the main drivers of inflation has been the rise in fuel prices, which is expected to soon carry over to other prices.

According to Statistics Estonia, consumer prices rose by 3.4 percent year-on-year in April. One-third of this increase came from energy, mainly fuels. Motor fuel prices remained high due to the war in Iran and the associated supply and production disruptions of petroleum products in the Persian Gulf region.

Among liquid fuels, diesel has seen the largest price increase. It is widely used in sectors beyond road transport, and for European countries, including Estonia, the importance of Middle Eastern countries as diesel suppliers has grown in recent years.

"In April, the price of diesel fuel increased by more than a third year-on-year. Neither European countries' own production capacity nor new supply channels have been able to compensate for the reduced supplies from the Middle East. Gasoline, which holds a larger share in the consumer basket than diesel, cost 10 percent more in April than at the same time last year," Matsulevitš said.

At the beginning of May, gasoline in Estonia was as expensive as in neighboring Latvia and Lithuania, while diesel was cheaper. Although price increases typically reduce consumption, March saw a rise in fuel sales as people stockpiled in fear of continued price hikes.

"Depending on how long the higher price level persists, the increase in transport fuel prices is expected to spill over into other areas. The war in the Persian Gulf region has also led to a shortage of jet fuel, but in April, international air travel was still cheaper than a year ago. Compared to March, prices were only slightly higher. If air travel becomes more expensive and less accessible, interest in domestic tourism and travel to neighboring countries is likely to grow during holiday periods. Regarding transport prices, train travel is expected to become cheaper in May, as prices for certain types of tickets in Estonia will be reduced by up to a third," said Matsulevitš.

The growth in food prices slowed significantly in April, standing at 2.6 percent year-on-year. Butter and pork became cheaper, and the price increase for several internationally traded food commodities, such as coffee and cocoa, decelerated. Among industrial goods, the prices of clothing and footwear continued to fall, partly due to competition from cross-border e-commerce. The stock market price for electricity was a quarter cheaper in April than last year, but its volatility is increasingly motivating households to fix their rates, which in turn limits the impact of monthly fluctuations on consumer prices.

"The harmonized inflation rate across the eurozone was 3 percent in April, while it was 4.9 percent in Lithuania and 3 percent in Latvia. In Estonia, last year's VAT increase will continue to boost annual price growth until July. Excluding tax changes, Estonia's inflation rate has been among the lowest in the eurozone in recent months," Matsulevitš added.