Ministry: Inflation has remained stable in recent months

TALLINN – According to Kristjan Pungas, an analyst at the Ministry of Finance's fiscal policy department, the gap between Estonian and euro area inflation has been smaller than usual in recent months, and food prices are at a similar level to last year.

According to Statistics Estonia, prices rose by 0.4 percent in May compared to the previous month, and annual inflation accelerated from 3.4 percent in April to 3.7 percent in May. In the euro area, price growth accelerated to a preliminary 3.2 percent due to rising service costs.

"While inflation in the euro area has accelerated significantly due to events in the Middle East, reaching its highest level in two and a half years, in Estonia, price growth has remained relatively stable in recent months. This has been supported by the fading effect of high-impact price hikes from a year ago, which balances out the impact of higher energy prices," Pungas noted in a press release.

According to the analyst, the effects of the Strait of Hormuz blockade were passed on to household gas prices in early May, and the first signs are also visible in district heating prices. Although the exchange price for electricity is lower than a year ago, an increase in the price of fixed-rate packages has been noticeable in recent months. "This may indicate that markets expect higher gas prices to persist for a longer period, which in turn could mean higher electricity prices during peak consumption times and in the autumn-winter period when the share of more affordable renewable energy is smaller than usual. Energy prices have risen by almost 10 percent over the year," Pungas stated.

He explained that the pass-through of high energy prices to the prices of other goods and services occurs with a delay. Some effects can already be seen in transport services, where the share of fuel costs is higher than average.

According to Pungas, food price inflation has slowed significantly in recent months, and in May, food prices were close to last year's level. This has been supported by a decline in food import prices. In the second half of the year, food prices may start to rise again as the effects of high energy and fertilizer prices materialize.

"Although there is great uncertainty regarding the Middle East conflict, the fading effect of the VAT rate increase in July will soften the potential impacts. Based on current energy price expectations and the economic environment, inflation may temporarily accelerate to over 4 percent in the autumn and at the end of the year," the analyst forecast.