OREANDA-NEWS.  March 11, 2014. Data from Statistics Estonia show that inflation in Estonia slowed in February to 0.6%. Inflation has been falling steadily since last summer and the last time inflation was below one percent was four years ago. Consumer prices were 0.1% higher in February than in January.

Preliminary assessments show that inflation in the euro area stood at 0.8%* in February, the same as in the preceding two months. Although there was no change in inflation in the euro area in February, prices of manufactured goods rose faster, though this was offset by a simultaneous fall in energy prices.

The fall in energy prices was the main factor behind the fall in inflation in Estonia. Motor fuels were 4.6% cheaper in February than a year earlier, while heat energy was 4.7% cheaper. The price of district heating was affected by the lower price of gas, which is linked to changes in the oil price over the past three quarters. The strengthening of the euro has also had a strong impact on the fall in energy prices. However, the factors that have driven the fall in energy prices have probably by now been exhausted.

The sharp rise in electricity prices of 29% in 2013 was replaced by falls of 1.3% in January and 4.1% in February. The price on the electricity exchange fell in February to its lowest level for a year and a half as electricity consumption was lower than usual because the weather was warm. The electricity price was also brought down by the energisation of EstLink 2, which increased the transmission capacity between Estonia and the Nordic countries and led to stiffer competition in the local electricity market.

Food products, which includes alcohol and tobacco, were 2.8% higher in price in February than a year earlier. Food prices have exited their slump on world markets and the price of milk for example has been rising for a long time, while prices of coffee, sugar and cocoa rose sharply in February. The impact of these price rises is steadily passing through to Estonian consumers.

Core inflation, with food and energy prices removed, stood at 0.8% in February. Without the effect of lower prices for communications, inflation in service prices would have been 3.4%. The slowdown in prices of imports meant that inflation in prices of manufactured goods also slowed, falling to 0.4% in February. Prices for goods sold in Estonia are highly dependent on what happens in foreign markets as imports account for around 40% of household consumption, but the higher inflation rate for manufactured goods in the euro area was not reflected in Estonian prices.

Eesti Pank’s forecast expects consumer price inflation in Estonia to be 2.1% in 2014. Inflation will remain low in the coming months, partly because of the high comparison base from last year, but it is forecast to pick up in the second half of the year.