The Estonian statistical office has released consumer price inflation figures for May. As broadly expected, the annual rate of inflation entered negative territory in the month: CPI dropped by 0.3% y/y (0.0% m/m) compared with an increase of 0.3% y/y in April.
The rise in oil prices offset the deflationary pressure somewhat. However, due to a significant slowdown in growth, we anticipate a continuation in the downward trend in CPI in coming months.
Details
Estonian CPI declined by -0.3% y/y in May compared with an increase of 0.3% y/y in April. The decline was smaller than we had expected (-0.7% y/y) mostly due to an underestimated impact of an increase in fuel prices.
The decline in monthly CPI mainly stemmed from the ongoing dropping price of energy products (housing cost declined by 1.3% m/m) and food prices (-0.3% m/m) while increases in transportation costs (1.6 % m/m) prevented annual CPI from posting a more significant decline.
Assessment & Outlook
The latest Estonian GDP numbers indicate a very weak growth performance in GDP and even more negative figures are expected during the next quarter. We do not expect growth in Estonia to resume before 2011. Thus, we forecast a continuing declining trend in CPI, which will probably persist until 2010. Returning to positive dynamics will not be possible without a return to positive growth. There is some risk related to rising oil prices, but we maintain our average inflation forecast for 2009, whereby CPI is expected to decline by 0.6% y/y.
