Other. Transport. Housing. Alcohol, tobacco. Food. Consumer prices

Transcription

1 Macro Research Macro Research - The Estonian Economy 1 November, 214 The Estonian Economy Newsletter The ghost of deflation Consumer prices surprisingly low in 214 Lower energy and food prices behind deflation Prices turning upwards again in 215 Consumer prices surprisingly low in 214 The consumer price level has been on a sharp downward trend in Estonia since summer of 213. In October, deflation continued for the fifth consecutive month. Price growth expectations have also come down, although the majority of the respondents still expect prices to grow in the future. Lower energy and food prices behind deflation Deflation has hit Estonia due to a combination of several factors. Externally, the falling price of oil and a stronger euro have pushed down the prices of energy and other imported goods. Internally, tighter competition on the electricity market has suppressed prices of electricity. Favourable weather, good crop yields, and the restrictions on exports to Russia have slashed food prices. Prices turning upwards again in 215 Consumer prices will start to gradually increase next year, from. in 214 to 1. in 215, on average. The price increase will be supported by a weaker euro and an increase in excise tax rates. The contribution of these two factors to the overall consumer price level in 215 is expected to be around half a percentage point, each. At the same time, global commodities markets, including for oil, will remain soft, with ample supply. We expect the price of oil in euros to decline by around in 215; thus the prices of motor fuels should also shrink a bit in Estonia next year. Contribution to annual CPI growth, pp f Source: Statistics Estonia, Swedbank Other Transport Housing Alcohol, tobacco Consumer prices Tõnu Mertsina , tonu.mertsina@swedbank.ee Liis Elmik , liis.elmik@swedbank.ee Teele Aksalu , teele.aksalu@swedbank.ee November 1, 214 Please see important disclosures at the end of this document Page 1 of 5

2 The ghost of deflation Deflation continued for the fifth consecutive month in Estonia in October. Consumer prices have declined due to lower prices of energy (electricity, heating, and motor fuels) and food. Consumer prices will start to gradually increase next year, from. in 214 to 1. in 215, supported by a weaker euro and an increase in excise tax rates. Deflation continued in October Reasons for deflation in Estonia In October, deflation continued for the fifth consecutive month in Estonia. Annual deflation decelerated from. in September to. in October. If prices decline long enough for households to expect prices to continue decreasing, and to therefore postpone their purchases, then consumption and investment will shrink, threatening the already-fragile recovery of Estonia s economy. According to an October survey, however, the majority of the survey respondents 1 still expected prices to increase in Estonia. About 6 of respondents expected prices to go up, and to go down, in the next twelve months. Inflation expectations in Estonia % - Percieved price trend, last 12 months (left Percieved price trend, next 12 months (left Actual inflation (right Source: European Commission, Statistics Estonia Changes in Estonia s consumer prices are calculated using a basket of goods and services of an average Estonian household. The biggest items in the basket are food products (meat and dairy products, and bread; share in the basket, 2), housing-related items (rent, heating, water, and electricity; share, 18%), and transport-related goods and services (share, 1). Contribution to annual CPI growth, pp Communication Transport Housing Alcohol, tobacco Consumer prices, yoy Source: Statistics Estonia Lower energy prices behind the slowdown of inflation The consumer price level has shown a sharp downward trend in Estonia since summer of 213. The three biggest contributors to the deceleration of inflation have been housing (electricity and heating), food, and transport. In 213, the price of electricity jumped by 29%, 1 Price expectations are part of the EU-wide consumer surveys published at the DG ECFIN website: November 1, 214 Please see important disclosures at the end of this document Page 2 of 5

3 year-on-year (yoy), on average, after the liberalisation of the electricity market in Estonia. However, the price has come down somewhat in 214 (by, on average, during the first nine months of 214). This decline has been caused by better connectivity with the cheaper electricity market in the Nordic countries, an extraordinarily warm winter and summer in the region (pushing down demand), and lower fees for the electricity network since spring of this year. Change in electricity and heating prices in Estonia, yoy Electricity Heat energy Change in Estonia's motor fuels' and global oil prices, yoy Motor fuels Global oil price, EUR prices are also lower The prices of heat energy and electricity are closely related to the global price of oil, which is often used as a reference price in energy contracts. The price of oil in euros has been on a downward path for two years now. Due to the ample supply of oil in the Middle East and North America, the price of oil declined to surprising lows at the beginning of November. This is pushing down heating and transport costs while lifting consumer demand and economic growth, as households have more money to spend on other goods and services. The stronger demand could, in turn, lift the prices of certain goods and services. The declining price of oil has also suppressed the prices of motor fuels in Estonia. During the first nine months of 214, the world s oil price (ICE Brent, in euros) decreased by 4., on average, while motor fuel prices in Estonia came down by 2.7%, on average, compared with the same period last year. We expect the price of oil in euros to decline by around in 215; therefore, the prices of motor fuels should also shrink a bit in Estonia next year. At the same time, transport prices will be affected by a planned increase in the prices of electric train tickets in November 214. Ferry ticket prices might also be raised next year, following the requirement to use more environmentally friendly, but also more expensive, fuel on ferries, starting in January 215. The third main component of the slowdown in consumer prices in Estonia is food. The very volatile prices of vegetables, depending largely on weather and crop yield, peaked in July 213, and the prices have subsequently come down. The prices of bread (and other flour products) and meat have been on a downward trend in recent months due to ample supply. Meat prices have been pushed down by the closure of the Russian market to meat products and the outbreak of the latest swine virus. Dairy prices were still above last year s levels in October but are expected to fall because producers are grappling with Russia s import restrictions. Change in selected food prices in Estonia, yoy 4 Change in selected food prices in Estonia, yoy Bread, cereals Meat Fish Fruit Vegeta bles Sweets -1 Dairy November 1, 214 Please see important disclosures at the end of this document Page 3 of 5

4 Stronger euro has pushed down import prices Swedbank expects these mostly short-term factors to gradually fade away and the food prices to rise again gradually next year, supported by a strong growth in consumers purchasing power. Prices will also be lifted by the weakening of the euro against the U.S. dollar, that will make imported food products more expensive in the euro area. Other big contributors to deflation have been education services. Free higher-education opportunities widened to cover second-year as well as first-year students. The prices of communication services have been shrinking as well, due to tight competition on the market. Inflation has slowed across the euro area, not only in Estonia. One of the reasons for the slowdown of the price increase in the euro area has been the strengthening of the euro against the U.S. dollar from the summer of 213 through the summer of 214. This has made certain imported goods and services cheaper for European consumers. But this trend turned around in August, and the euro started to weaken against the dollar in September. The slide in the euro exchange rate is expected to continue next year due to diverging monetary policies in Europe and the US. We expect the euro to weaken by around 7% vis-avis the dollar in 215, on average. This will lift the prices of some imported goods and services in the euro area that are paid in dollars. As in Estonia around 1 of imports of goods are paid in dollars, the expected weakening of the euro-dollar exchange rate could lift the consumer price level in Estonia by around.5 percentage point in 215. Change in harmonised index of consumer prices (HICP), and EUR/USD, yoy EUR/USD (right Euro area HICP (left Estonia HICP (left Inflation to reach 1. in 215 Prices will start increasing again in 215 According to Swedbank s latest forecast, consumer prices will start to gradually increase next year. The consumer price index will rise from. in 214 to 1. in 215. The price increase will be supported by a weaker euro and an increase in excise tax rates. The contribution of these two factors to the overall consumer price level in 215 is expected to be around the same for each, +.5 percentage point. At the same time, global commodities markets, including for oil, will remain soft, with ample supply. We expect the price of oil in euros to decline by around in 215; thus the prices of motor fuels should also shrink a bit in Estonia next year. The rise in consumer prices will be more than offset by a decline in labour taxes of 1.6 percentage points in January 215. Also, as wages will continue increasing rapidly, consumption will remain strong next year. Liis Elmik November 1, 214 Please see important disclosures at the end of this document Page 4 of 5

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