By Sulev Pert, Economist at Eesti Pank.

Data from Statistics Estonia show inflation remained low in July for the second consecutive month at 2.2% over the year. Average inflation in the euro area remained close to 3% at the same time, and Estonia had the lowest inflation in the euro area in July. This has only happened once before, at the start of the pandemic in 2020. The price level was 0.5 percentage point higher than in the previous month as prices rose for waste disposal, water services and rents.

Inflation came down mainly because prices fell for food products. The consumer food basket was as much as 1.6% cheaper in July than it was a year earlier. Butter and dairy products saw the largest falls in price. The biggest differences from food prices in the euro area were in seasonal products, as prices in Estonia have dropped particularly for fruit and vegetables this year. Fruit prices were 11% lower in July than a year before and vegetable prices were 4% lower, while prices for those products rose in the euro area at the same time. The difference is partly a consequence of favourable weather this year in the Baltic states and Poland. It will become clear in late summer and autumn how much damage the fires in southern Europe have caused to this year’s harvest. The impact of unfavourable weather and higher prices for inputs may be passed through more strongly into consumer prices at the end of this year and the start of next year.

The main impact from energy prices was that electricity was 4% cheaper in July than in June. Cheap electricity from Finnish nuclear plants brought the Estonian exchange price down to 44 euros per megawatt hour, while the heatwave in central Europe drove the price of electricity there up to 100-150 euros per megawatt hour. Electricity prices in Estonia at the start of August have also been very favourable. Low water levels in the Nordic countries and maintenance work at power stations could however cause prices to rise in autumn.

The oil price ranged between 70 and 100 dollars a barrel in July. Fluctuating fuel prices affect the prices of transport services most immediately, as fuel is as much as a quarter of the total costs for transport companies.

Another factor alongside the temporary effect of favourable weather that has kept inflation in Estonia lower than in other euro area countries has been the long fall in prices for clothing and for insurance. Prices for clothing have largely fallen because of import prices, as the markups of retailers remain substantial. Competition in the insurance market has pushed insurers to find ways of cutting their prices.

Eesti Pank forecasts that inflation this year will be 3.4%.

Source: eestipank.ee