Flash comment - June 7, 2011: CPI growth is continuously driven by food prices

1. Flash comment
Economic commentary by Economic Research Department June 7, 2011
CPI growth is continuously driven by food prices
According to data released by Statistics Estonia, consumer prices
Consumer Price Index increased by 5.4% yoy and 0.1% mom in May. This is a bit higher than our
20% 4% expectations as we expected the growth of food prices to slow more. The
strongest increase was reported in food and non-alcoholic beverages with
15% 3% 12.2% in annual comparison; the fastest growing were potato, coffee and
sugar prices. As food, housing and transport prices cover about half of the
10% 2% households’ expenditures, they also affect the changes in CPI the most. As
food prices are for the most part determined by changes in the global
5% 1% market, we expect food price growth to slow – this is also supported by
global developments. The price of milk and dairy products, at the same
0% 0% time, is additionally affected by demand-side factors – growing demand in
2008 2009 2010 2011 Russia and thus their willingness to pay higher prices in turn increase the
-5% -1%
prices in the domestic market as well. However, as increasing demand in
Russia is strongly connected with their poor production, these price
-10% -2%
monthly growth (rs) annual growth
pressures should start to ease when Russia is again capable of covering
food, annual growth their own demand. Also, as summer approaches, the increase in
agricultural production is expected to ease vegetable and grain price
pressures.
In addition to food, consumer price growth is impacted by increasing
energy prices – heating energy prices grew by 2% in May compared to
April and electricity prices are set to increase in August. As growth in
energy prices tends to spill over to other prices, the slowdown in overall
inflation might not be that pronounced. At the same time, future price
growth is impacted by high comparison base (price growth accelerated in
September last year) which will bring down the growth rates in the second
half of the year.
There was a substantial increase reported in prices of hotels, cafes and
restaurants services (2.5% mom) which most likely is connected with
growing tourist numbers as higher demand allows accommodation and
catering establishments to raise prices; Tallinn’s title as the European
Capital of Culture probably has its effect as well.
Annika Paabut
Acting Chief Economist
+ 372 6 135 440
annika.paabut@swedbank.ee
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