Service prices driving inflation in Estonia
Rising prices in Estonia are being driven by faster increases in the cost of services, which in turn are supported by wage growth, analysts say.
Commenting on the consumer price index figures released Friday, Bigbank chief economist Raul Eamets said that price increases are being driven by the faster rise in service costs, which in turn is based on wage growth.
"The share of labor costs in providing services is higher than in manufacturing and when wages increase, the rise in labor costs is passed on to service prices that the end consumer pays. In other words, the impact of wage growth on prices appears more quickly and to a greater extent," Eamets explained.
"Food prices continue to rise faster than overall inflation. In addition, last summer's VAT increase and the rise in healthcare service prices in the spring are pushing up the annual figure. The latter two factors will drop out of the calculation in the second half of this year. At the same time, the abolition of the tax hump and wage growth — driven this year by the public sector — will continue to maintain price pressures," Eamets said.
Analyst: Prices haven't grown much in the past year
Luminor chief economist Lenno Uusküla noted that considering the VAT increase in the middle of last year and high electricity prices in January and February, prices in Estonia have risen relatively little over the past year. "Food prices have increased by 5.5 percent over the year. Alcohol and tobacco have also become more expensive, rising by 7.9 percent, though this follows a previously modest increase in prices," he said.
However, when the VAT increase is excluded, prices in many categories have actually fallen, Uusküla said. Clothing and footwear prices have dropped by 5.7 percent even when accounting for the VAT increase. Transport has become 0.4 percent cheaper. Education prices have risen by 0.9 percent, while housing costs have increased by 1.5 percent, though this is still less than the VAT increase.
"Oil prices have risen amid the conflict in Iran, but at present it appears the conflict will be short-lived and will not have long-term effects on oil prices. Nevertheless, oil prices may remain high in the coming months and create price pressure in the first half of the year. Many other factors, however, are helping keep prices stable or even pushing them lower," Uusküla added.
Consumer prices rose by 0.8 percent in February compared with January; adjusted for seasonal factors, prices increased by 0.5 percent. Compared with the same month a year earlier, consumer prices in February were 3.1 percent higher.
--
Editor: Marcus Turovski
