- Consumer price inflation in Estonia was higher than expected in August at 5.5% year-over-year, driven by increases in food, transportation, and housing costs. Housing costs rose significantly due to an 8.4% increase in electricity and heating prices. - The ongoing high inflation is reducing purchasing power for many households and forcing some to cut spending, which could threaten the recovery in domestic demand. Producer margins appear to be growing rapidly or competition is weak as some global commodity prices have fallen. - Inflation is forecast to slow in the last months of the year but likely not as much as previously expected, as administratively set price increases continue and electricity price increases could spill over to other prices

1. Flash comment: Estonia
Economic commentary by Economic Research Department Sept. 7, 2011
Expected consumer price slowdown delayed
Consumer price index, annual growth According to Statistics Estonia, consumer prices grew by
14% 3.5% 5.5% yoy and 0.3% mom in August. We expected a much
12% 3.0% slower growth assuming the seasonal decline of food prices
10% 2.5% to be bigger (esp. after a strong increase in July) and the
8% 2.0% impact from the end of the clothing and footwear sales period
6% 1.5% to be weaker.
4% 1.0% Similarly to previous months, the main contributors to price
2% 0.5% growth were food, transport cost and housing cost prices.
0% 0.0% Housing costs were the most impacted by sharp increase in
-2%2008 2009 2010 2011 -0.5% administratively regulated prices – the price of electricty and
-4% -1.0% heat energy increased by 8.4% yoy. Transport costs were up
Monthly growth (rs) Annual growth by 5.6% yoy due to higher fuel prices and increased public
Goods Serv ices
transport prices (already in July).
Continuous price growth is „eating away“ the already weak
Contributions to annual CPI growth
increase in household incomes, increasing the share of those
12 other
transport households who manage to cover only their basic needs.
10 housing
f ood
Growing compulsory expenditures (food, housing and
8 CPI transport prices) are forcing budget constrained households
6
to cut their expenditures which in turn will threaten domestic
demand recovery as households’ saving propensity
4
increases. Weaker domestic demand recovery, however, will
2
impact other closed sectors (e.g. services).
0 In our opinion, strong price growth of this scale is pointing to
-2
2008 2009 2010 2011 rapid margin growth of producers/sellers and/or weak
competition level because several commodity prices in the
-4
world market have already been declining. We expect the
price growth to slow during the last months of this year due
to high base effect (price growth accelerated in September
last year) as well as favourable developments in the world
market (dairy products, grain and oil prices have fallen).
However, the slowdown of price growth will probably be
much less pronounced than we previously believed; the main
reason for this is increase in administratively regulated
prices. In addition, the risk of electricity price spillover to
other prices due to increased production costs is very high.
Still, price growth should also somewhat be dampened by
falling demand as the number of budget constrained
households in growing.
Annika Paabut
Acting Chief Economist
+ 372 6 135 440
annika.paabut@swedbank.ee
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