Last year’s deflation was caused by sluggish demand and a decline in taxes.- Inflation should return in the second quarter this year.
Consumer prices decreased by 0.4% in Estonia in 2020, one of the weakest price recordings in the euro area. Prices were lower due to sluggish demand and the abolition of different fees/prices on different services during lockdowns, but also due to a reduction of excise taxes, which had a significant impact on the index – without excise tax reductions consumer price index would have not declined.
Transport, or motor fuels more specifically, had the biggest impact on the price index, caused by cheaper price of oil and substantially lower excise duty on diesel fuel. Diesel fuel was 17% and petrol 6.4% cheaper than in 2019.
Housing has become cheaper, too, because rental prices have decreased due to larger supply of rental apartments when the movement of people across borders has declined (tourists, students, foreign workers). In addition, electricity and in some areas also water supply has become cheaper. The price of electricity declined as demand was lower (partly due to a record-warm winter one year ago) and taxes on electricity were lowered, too.
Food and healthcare prices, especially for dental care, increased, unfazed by the pandemic. The demand for those remained solid.
In 2021, inflation should re-appear in Q2, and amount to 0.9% in 2021 as overall demand for different goods and services strengthens, and the impact of tax reduction fades after May. The average wage growth (+3.5% in 2021) should still surpass price growth.
