April CPI drop puts Estonia close to deflation

The consumer price index rose 0.3 percent year-on-year in April after a rise of 2.0 percent in March. It fell 0.7 percent in the month in April after falling 0.5 percent in March. The median forecast in a Reuters survey was for annual inflation of 0.8 percent and a fall in the month of 0.3 percent. The last time year-on-year price growth was so slow was in June 2003, when it also rose 0.3 percent.

In April compared to the previous month, the consumer price index was mainly influenced by the price decrease of food, especially of dairy and meat products, by a continuous price decrease of heat energy and by a price increase of motor fuel,' the statistics office said in a statement. On a year-on-year basis, the consumer price index was mainly influenced by rising prices for alcoholic beverages and tobacco and by price falls for motor fuel and food.

Analysts see the country entering a deflationary situation in May as heating costs and energy prices remain low, but said it would be short-lived. The possibility of deflation from May is very high,' said SEB analyst Ruta Aurmae.

The falling trend in prices would be supported by an ongoing fall in heating and food prices. I don't think deflation is a threat, it will not go on for very long. Energy prices will rise,' she added. The central bank restated its forecast prices would fall 0.5 percent on average in 2009. Nordea said in a research note that 'the faster than anticipated fall in inflation reinforces our expectations that inflation will moderate to below zero during 2009'.

Estonia's plans to join the euro zone have been held at bay in recent years as inflation hit double digits during an economic boom fuelled by cheap credit. But the country has neared a deflationary situation due to the onset of recession. The central bank has forecast a drop in gross domestic product (GDP) this year of 12.3 percent.

Source http://lse.co.uk/macroeconomicnews.asp

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