Flash comment: Estonia

Economic commentary by Economic Research Department Jan. 8, 2013

External price pressures will diminish, domestic will take over

Contributions to CPI annual growth
12% 10% 8% 6% 4% 2% 0% 2008 -2% -4% Other Housing Transport Food CPI

2012 According to Statistics Estonia, CPI annual growth slowed from 3.6% in November to 3.5% in December. Pre-Christmas sales campaigns on alcohol products and small decreases in fuel prices pushed the monthly inflation to a negative territory (-0.1%) for the second month in a row. Through 2012, consumer prices were mainly influenced by external factors - higher energy prices over the first half of a year and sharp increase in global food prices in the summer. In addition, the euro was weaker vs. major trading partners until the late autumn. However, domestically driven core inflation remained relatively subdued. 2013 We see that external price pressures will gradually diminish over 2013. A well supplied global oil market and weak global business cycle are expected to result in somewhat lower global oil price. However, we see that domestic sources will become the main inflation drivers. Electricity market liberalisation for households and SMEs in January will result in approximately 25% higher electricity bill and increase the consumer price level by about 1%. In addition, excise taxes on alcohol and tobacco will be increased over the course of 2013. Due to recent increase in labour cost pressures (public sector wages will see a broad-based increase), there are also some risks that unit labour costs will creep higher and will partly be passed through to the consumer level. All in all, we expect price growth to be somewhat lower in 2013 as compared to the previous year. This will be seen more clearly towards the second half of a year when the hike in electricity prices has passed.

2009

2010

2011

2012

Inflation expectations, pts

60 50 40 30 20 10 0 2009 -10 -20 -30 -40 2010 2011 2012 consumer industry retail services

Kristjan Tamla Acting Chief Economist +372 888 7952 kristjan.tamla@swedbank.ee

Swedbank Economic Research Department SE-105 34 Stockholm, Sweden ek.sekr@swedbank.com www.swedbank.com Legally responsible publisher Cecilia Hermansson, +46 8 5859 7720

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