Estonian Inflation Falls Below Euro Area Average

Back in April 2008, the 12 month inflation rate in Estonia was as high as 11.6%, more than eight percentage points above the euro area average of 3.3%. Given the fact that Estonia pursued (and still pursues) a fixed exchange rate policy versus the euro, that was a very big difference.

Since then, the euro area average has gone down 2.7 percentage points to 0.6%, while Estonia has seen its inflation rate drop a full 11.3 percentage points to 0.3%in April 2009, so that for the first time its inflation rate is below the euro area average. It would have been even lower if it hadn't been for an 18.9% increase in alcohol and tobacco prices, something which is presumably due to a tax increase.

While the euro area inflation rate will probably not fall by much more (base effects means that it might fall some more, but the recent commodity price rally will limit this effect) before it starts rising again later this year, Estonia will probably see this trend continue until the inflation rate is well below zero.

The reason for this is that while money supply growth in the euro area remains firm, money supply growth in Estonia has been negative for some time now, and stood at -12.4% in March.