Ministry of Finance: Middle East conflict is putting pressure on prices

TALLINN - Although the escalation of the Middle East conflict has caused a significant increase in the price of oil, gas, and other raw materials, the acceleration of inflation in March remained modest, said Kristjan Pungas, an analyst at the fiscal policy department of the Ministry of Finance. He explained that the conflict's full impact on prices will be delayed by a few months.

According to data from Statistics Estonia, prices in March remained at the same level as the previous month, while annual inflation accelerated from 3.1 percent in February to 3.6 percent in March.

"Oil prices rose by 46 percent over the month, which was quickly reflected in pump prices, leading to an 18 percent increase. The rise in motor fuel prices was cushioned by the retreat of the stock exchange price of electricity from its winter highs. Warm and sunny weather boosted renewable energy production and reduced consumption, and the exchange price in March was the lowest in recent years for that month," Pungas stated in a press release.

According to the analyst, the effects of the conflict will carry over to gas prices with a delay of a few months, and this is expected to be reflected in household gas bills in May. However, this large percentage price increase is occurring as the heating season ends and gas consumption declines.

"The prices of food commodities started to fall in the second half of last year, which has also slowed the increase in food prices in Estonia. Food prices have risen by 4.2 percent over the year, while oils and some dairy products have become cheaper. The margins of retail chains are below the average of recent years, and more special offers have been necessary to attract consumers," Pungas noted.

According to the spring economic forecast, prices are expected to rise by 4 percent this year. "The deepening of the Middle East conflict will lead to an increase in energy prices, which will gradually be passed on to the prices of other goods and services. Therefore, the inflation forecast has been revised upwards. These effects will be softened this year by a more modest price increase for food and services and a reduced impact from tax measures. As a measure to alleviate high energy prices, the government has decided to cancel the fuel excise duty hike that was planned for May," the analyst explained.

However, he said there is great uncertainty regarding the scope of the crisis and its future developments. "The production capacity of the Persian Gulf region is limited, and supplies of petroleum products and other essential goods have been disrupted for over a month. The longer these trade routes remain blocked, the greater the impact will be on global trade and prices," Pungas stated.

In the euro area, price growth accelerated to an estimated 2.5 percent, driven by higher energy prices.