OREANDA-NEWS. April 15, 2014. Data from Statistics Estonia show that inflation in Estonia slowed in March to 0.2% over the year, while prices were up 0.3% on February. Preliminary assessments show that harmonised consumer price index inflation in the euro area slowed from 0.7% to 0.5%.

Recent price movements indicate strongly that the slower inflation in the external environment may successfully offset the price pressure coming from the Estonian domestic economy. The external environment has had a large impact as imported goods make up around 40% of the Estonian consumer basket. This is one reason why prices of durable goods continued to fall, as they have now for some years.

The main cause of the slowdown in inflation is, however, the fall in the prices of commodities, especially the fall in the euro price of oil over the past two years. Cheaper imported energy lowers the compulsory expenditure of households, allowing them to consume more and supporting the real growth of the economy. Energy takes a larger share of the Estonian consumer basket than it does of the euro area’s, and this means that the fall in energy prices has had a larger impact on inflation here.

Estonian inflation slowed sharply at the start of this year, but the slowdown had a relatively narrow base. In the consumer basket, 33% of the items were cheaper in March than a year earlier, which is not particularly unusual. In recent months the share of goods and services with falling prices has remained almost unchanged, while the share of goods with prices rising rapidly, that is by more than 5%, has shrunk to 11%.

Although the inflation rate is remaining low at present, the chances of a long-term fall in prices are not high. Average wages continue to grow by around 7% and there is no clear sign of any slowdown in wage growth, so domestic price pressures are relatively strong. The impact of higher labour costs can be seen most directly in the prices of services, which rose by 1.1% year-on-year in March. As in previous months, inflation in the prices of services was held down by falling prices for communication services, without which service price rises would have reached 3.2%.

Another cause of the slowdown in inflation is that administrative price rises have been lower this year than in some preceding years. Although prices for alcohol and tobacco continue to be pushed higher by increases in excise taxes, there has been an offsetting effect from free services for higher education. The largest fall in regulated prices in March from a year earlier was in the price of heat.