Estonian inflation remains subdued

  • 2010-08-12
  • Staff and wire reports

The Bank of Estonia estimates that the 2.9 percent year-on-year price growth in July was mostly caused by the increase in food and energy prices, reports Postimees Online. According to the central bank, the year-on-year inflation in the rest of the shopping cart amounted to a modest 0.7 percent.

Economist at the Bank of Estonia Martin Lindpere estimated that the economic activity level has been growing since the beginning of the year, but due to the major decline during the previous years, the inflation rate in Estonia remains low. The exception here is the price for food and energy – these have been significantly affected by factors of the external environment.

Lindpere remarked that habitually, July is the month of seasonal discount campaigns when the prices of durable goods and clothing are usually lowered. He asserted, however, that in many European countries the summer season discount campaigns are much bigger than in Estonia.

When forecasting into the future, Lindpere says that due to the decreasing impact of the tax measures devised to improve the budgetary positions, the inflation rate pace in Estonia would start decelerating significantly during the coming months. At the same time, the weather conditions will pressure food prices on the global market and that might, in the coming months, affect prices in Estonia as well.

Danske Markets notes that Estonia’s producer price index statistics show that inflation risks remain, despite some of the current indicators appearing to give no direct cause for alarm. Senior Baltic analyst Violeta Klyviene, though, says that the year-on-year price growth of 2.9 percent in July complied with expectations and the inflation pressure eased in comparison to June’s 3.5 percent growth in the year-on-year perspective.

She explained that the price growth risks are connected with the adoption of the euro. According to Klyviene, the mechanical change in the used currency is no reason for a price rise, but the experiences of other countries indicate that this might become a significant psychological factor that might bring about a short-term price increase shock.
However, the analyst stated that domestic demand is likely to remain weak this, as well as next year. If the external environment’s impact on local prices does not become stronger, the consumer price growth should not accelerate.